A Renault car dealership on Thursday in Strasbourg, France. Renault shares plunged over 20 percent before recovering some - Vincent Kessler/ Reuters
MILAN/PARIS - 27 May 2019: Fiat Chrysler pitched a finely balanced merger of equals to Renault on Monday in a move to cope with the costs of far-reaching technological and regulatory changes by creating the world’s third-biggest carmaker.
If successful, the $35 billion-plus tie-up would alter the competitive landscape for rivals including General Motors and Peugeot maker PSA Group, which recently held inconclusive talks with Fiat Chrysler (FCA).
The Italian-American group’s plan, which was finalised in overnight talks with Renault, will be discussed at a meeting of the French company’s board on Monday.
Investors welcomed the blueprint for an automaker producing more than 8.7 million vehicles a year and aiming for 5 billion euros ($5.6 billion) in annual savings, with shares in both companies rising sharply.
It would rank third in the global auto industry behind Japan’s Toyota and Germany’s Volkswagen.
But analysts also warned of big complications, including Renault’s existing alliance with Nissan, the French state’s role as Renault’s largest shareholder and potential opposition from politicians and workers to any cutbacks.
“The market will be careful with these synergy numbers as much has been promised before and there isn’t a single merger of equals that has ever succeeded in autos,” Evercore ISI analyst Arndt Ellinghorst said.
With these sensitivities in mind, FCA proposed an all-share merger of equals under a listed Dutch holding company. After a 2.5 billion euro dividend paid to existing FCA shareholders, investors in each company would receive half of the new entity.
This would be chaired by John Elkann, head of the Agnelli family that controls 29 percent of FCA, sources familiar with the talks told Reuters, while Renault chairman Jean-Dominique Senard would likely become CEO.
Italian Deputy Prime Minister Matteo Salvini said the proposed merger could be good news for Italy if it helped Fiat to grow, but it was crucial to preserve jobs.
He did not comment on the French government’s 15% stake in Renault, but an influential lawmaker from the ruling League party said Rome may seek a stake in the combined group to balance France’s holding.
In a letter to employees seen by Reuters, FCA chief executive Mike Manley also cautioned a merger could take more than a year to finalize.
A deal could help both companies address shortcomings, as well as the challenges of switching to electric and self-driving technologies and tougher emissions regulations.
FCA has a highly profitable businesses in North America with its RAM trucks and Jeep brand, but lost money last quarter in Europe, where most of its plants are running below 50% capacity and it may struggle with new emissions curbs.
Renault, by contrast, was an early mover in electric cars, with relatively fuel-efficient engine technologies and a strong presence in emerging markets, but no U.S. business.
Both are marginal players in China.
“The case for combination is also strengthened by the need to take bold decisions to capture at scale the opportunities created by the transformation of the auto industry,” FCA said.
It could also have profound repercussions for Renault’s 20-year-old alliance with Nissan, already weakened by the crisis surrounding the arrest and ouster of former chairman Carlos Ghosn late last year.
Milan-listed FCA shares jumped as much as 19% in early trade, while Renault stock leapt 17%. PSA shares fell 2.5%.
“FCA fits as well with Renault as it does with PSA,” Jefferies analyst Philippe Houchois said in a note.
FCA-Renault, like almost every possible automotive pairing, had been studied intermittently for years by dealmakers. But the fractious relations between Ghosn and FCA’s late CEO Sergio Marchionne made constructive merger talks impossible until after Marchionne’s sudden death last July, banking sources said.
Prior to his November arrest in Japan, Ghosn had revived discussions about a deal to bring FCA into a reinforced Renault-Nissan alliance, sources have told Reuters.
PARIS AND ROME
The French government, Renault’s biggest shareholder, supports a merger with FCA in principle but will need to see more details, its main spokeswoman said on Monday.
France will be “particularly vigilant regarding employment and industrial footprint,” another Paris official said - adding that any deal must safeguard Renault’s alliance with Nissan, which had recently rebuffed a merger proposal from the French carmaker.
Seeking to soothe concerns, FCA stressed “new opportunities for employees of both companies”.
“The benefits of the proposed transaction are not predicated on plant closures, but would be achieved through more capital-efficient investment in common global vehicle platforms, architectures, powertrains and technologies,” it said.
Nissan, which is 43.4%-owned by Renault, would be invited to nominate a director to the 11-member board of the new company.
As alliance partners, Nissan and its affiliate Mitsubishi would benefit from an estimated 1 billion euros in annual savings from the merger, FCA added.