Fiat Chrysler Automobiles and PSA Group of France are in talks to combine, The Wall Street Journal and other media reported.

The newspaper, citing people familiar with the matter, said a deal between FCA and the Peugeot parent could create a “$50 billion trans-Atlantic auto giant.”

An all-share merger of equals, the paper reported, is one of the possibilities under consideration. PSA CEO Carlos Tavares would lead the combined unit as CEO while FCA Chairman John Elkann would assume the same role at the new company, the paper reported.

Under one recent proposal, Peugeot owner PSA would be the acquiring entity and the French side would have an advantage in terms of board seats, Bloomberg reported, citing a source familiar with the matter.

A merger of the Italian-American automaker and PSA, Europe’s second-largest car manufacturer, would create a global company with a current stock-market value of $47 billion — about the same size as Japan’s Honda Motor Co.

PSA’s board is holding an extraordinary meeting Wednesday afternoon French time, Bloomberg reported, citing two sources.

The Journal reported that “talks are fluid” and that “other options or terms could be considered.” The paper said “there is no guarantee that any final agreement will be reached.”

An FCA spokesman declined to comment on the talks.

“We do not comment on market rumors,” a PSA spokesman said.

Consolidation signals

Investors have speculated for several years that Fiat Chrysler was hunting for a merger partner, encouraged by the rhetoric of the company’s late CEO, Sergio Marchionne. In 2015, Marchionne outlined the case for consolidation of the auto industry, and tried unsuccessfully to interest General Motors in a deal.

The two automakers had discussed a combination earlier this year, before Fiat Chrysler proposed a $35 billion merger with French automaker Renault SA. 

A combination of FCA and PSA, “from a volume perspective, would make sense,” Richard Hilgert, senior equity analyst at Morningstar Inc., wrote earlier this year. Together, they would make almost 9 million vehicles a year, giving them the heft to better compete against VW, Toyota Motor Corp. and the Renault-Nissan Alliance, he said. This is particularly crucial in the small-car segments that both are known for in Europe and South America.

And for PSA’s Peugeot, planning a return to North America in 2023, FCA’s U.S. retail network “would give them an opportunity to pitch to an established set of dealers,” Hilgert said.

Evercore analyst Arndt Ellinghorst, in a note on Tuesday, said a combination of Fiat Chrysler and Peugeot “should ignite more rational industry behavior around allocation of capital and this particular merger makes materially more sense than a potential FCA-Renault merger.”

Previous approach

PSA Group approached Fiat Chrysler Automobiles this year about combining the two companies, but the Italian-American automaker rebuffed the overture, the Journal reported in March. 

FCA executives didn’t like the idea because it would increase exposure to Europe’s mature market, while the Agnelli family, with a controlling stake, isn’t interested in a transaction financed with PSA stock, the newspaper reported.

The latest talks come after FCA’s failed effort to combine with Renault in May. FCA withdrew its offer in June.

FCA said in a statement at the time that it became clear “that the political conditions in France do not currently exist for such a combination to proceed successfully.”

In a May letter to dealers in the U.S. and Canada, Reid Bigland, head of U.S. sales, described the proposal to Renault as a “bold step that will dramatically change both companies and the automotive industry.” He said the new company would tally worldwide sales of nearly 9 million vehicles annually with a “broader and more balanced global presence than either company on a standalone basis.”

The combined entity, Bigland wrote, would be a world leader in electric vehicle technologies along with premium brands, SUVs, pickups and light commercial vehicles.

Manley made clear during a July earnings call with investors that FCA is still open to opportunities.

Although the Renault deal didn’t happen, Manley sang the praises of the shelved tie-up during a July earnings call with investors, saying it “clearly added very, very significant synergies.” But he made clear that FCA has “a relatively robust business plan that survives with or without that type of merger.”

Tavares highlighted risks to the proposal, in a memo sent to top officials of the Peugeot owner in May, according to Bloomberg. Tavares said in the memo that Renault was chosen mainly because its value was depressed by the troubled alliance with Nissan Motor Co. following the Carlos Ghosn scandal. Ghosn, the longtime head of the Renault-Nissan alliance, was terminated following a financial scandal that enveloped him in Japan last year. He has proclaimed his innocence while awaiting trial.  

“The transaction proposed by Fiat Chrysler therefore seems particularly opportunistic, largely to its benefit,” the note said. “For Renault, this may be an asset in discussions with Nissan, but it could also weaken the alliance or even lead to an unwinding.”

The timing of the merger talks, meanwhile, could influence FCA’s ongoing labor contract negotiations with the UAW in the U.S. The union just ratified a new contract with GM and is now in active negotiations with Ford Motor Co., meaning FCA will be the last of the Detroit 3 automakers to reach terms with the UAW. It was not immediately clear if the UAW was made aware of the merger talks and there was no immediate comment from a UAW spokesman about the matter.

Another Tavares deal?

Under Tavares, a former No. 2 to Carlos Ghosn at Renault Group, PSA has gone from near-bankruptcy in 2013 to profit margins that rival — and even surpass — some luxury automakers. His signature deal came in 2017 when the French automaker acquired GM’s unprofitable European brands Opel and Vauxhall for $2.3 billion. Tavares vowed to restore Opel profits by 2020 but the milestone was reached in 2018.

PSA Group generated a record operating margin of 8.7 percent in the first half of 2019, even as automakers such as Daimler announced profit warnings. Tavares has pushed relentlessly for cost savings and efficiencies, through simplifying the model lineup, sharing vehicle platforms and strategically targeting r&d spending.

PSA’s main weakness in recent years has been the Chinese market, where two joint ventures have been bleeding sales and red ink, with a loss of 302 million euros in the first half of 2019. Tavares has vowed to remain in China, although PSA has reportedly been exploring the sale of some of its joint venture factories.

The French connection

The French government — a clear impediment to the failed Renault-FCA deal — holds a 12.23 percent share in PSA Group through its sovereign wealth fund Bpifrance, but it exercises much less control over PSA than it does at Renault.

The government paid 800 million euros ($889 million) in 2014 to help bail out then-struggling PSA, which received an equal amount of financing from the Chinese automaker Dongfeng Motor Group. Those two investments reduced the holdings of the Peugeot family and made it an equal shareholder with Dongfeng and the French state. At a market capitalization of 23.55 billion euros ($26.2 billion), the French government share would now be worth around 2.9 billion euros ($3.2 billion). 

Along with Dongfeng and the Peugeot family, the government can appoint two members to PSA’s 14-member board of supervisors. But it holds just under 10 percent of exercisable voting rights, compared with 19.5 percent each for the Dongfeng and the Peugeot family.
 

Jamie Butters and Reuters contributed to this report