Picture: REUTERS/REBECCA COOK
Picture: REUTERS/REBECCA COOK

Paris — PSA Group shareholders signed off on a combination with Fiat Chrysler Automobiles that’s endured two years of extraordinary drama, marked by on-again off-again talks, the transformation of their industry and a global pandemic.

During a meeting on Monday, investors in the French company approved the merger, valued at $52bn, to form Stellantis, the world’s fourth-largest carmaker, with Fiat Chrysler shareholders poised to do the same later in the day. The hurdles the two overcame to get to this point were plentiful and prodigious, with Fiat even managing to patch things up after a short-lived attempt to join forces with PSA’s arch-rival Renault.

Fiat Chrysler and PSA executives reckon they’ll boost returns with scale more closely resembling Volkswagen (VW) and Toyota Motor, and have greater resources to compete with electric-car startups and tech-industry interlopers. But plenty of challenges await once the deal is done. Stellantis will be an amalgam of model lines with enviable positions in certain segments, but neither company has much of a foothold in the luxury-car business or China’s vast vehicle market.

“Stellantis will be a sort of conglomerate of brands, some great and some not so good and most very regional,” said Jefferies analyst Philippe Houchois. “The merger will be a good opportunity for a re-set.”

Strengths, weaknesses

The combined company will boast an impressive presence in North America’s lucrative truck and SUV segments, thanks to Fiat Chrysler’s Ram and Jeep divisions. And PSA’s revitalised Peugeot and Citroën brands have excelled in Europe and are the envy of its turnaround-minded French foe, Renault.

But both also have their weaknesses. The merger of Fiat with Chrysler did little to improve the fortunes of the Alfa Romeo and Maserati luxury lines, while PSA’s purchase of Opel only made the company more reliant on Europe’s crowded and shrinking market.

Shares of Peugeot and Fiat Chrysler advanced as much as 2.6% and 2.2%, respectively, in Paris and Milan trading, giving the companies a combined market value of about €44bn.

The job of shaking up Stellantis’s portfolio will fall to PSA CEO Carlos Tavares, an ultra-competitive amateur rally driver who calls himself a “performance psychopath”. He takes a Darwinian view on the industry, arguing that only the strong carmakers will survive the pivot to electric drivetrains and pursuit of autonomous driving.

“We are ready for this merger,” Tavares told PSA shareholders, adding that the companies are also prepared to announce a date for completion of the deal.

Governance issues

Tavares “has a strong track record in M&A and operational restructuring”, Institutional Shareholder Services (ISS) analysts said in a report in December. While the proxy adviser recommended investors vote in favour of the merger based on its strong strategic and financial rationale, it did raise concerns about Stellantis’s governance.

ISS took issue with a loyalty voting structure that will give greater sway to investors who hold shares for at least three years, a binding-nomination process in which only the board will be able to nominate new additions, and a move away from annual director re-elections.

Still, those qualms are outweighed by Fiat Chrysler shareholders being paid a pre-merger dividend of €2.9bn. The boards of both companies are also considering a potential distribution of €500m to each company before they close the deal, or €1bn afterwards to shareholders of the combined entity.

The Agnelli family that controls Fiat Chrysler, led by chair John Elkann, agreed in September to shave €2.6bn off the initial dividend the carmaker’s shareholders will receive to give Tavares more cash to work with when he takes the helm of Stellantis.

Elkann said 99.15% of Fiat Chrysler’s shareholders attending a virtual meeting had voted in favour of the merger. That includes top investor Exor, the holding company of Italy’s Agnelli family. PSA’s shareholders gave their green light to the merger earlier on Monday.

Extracting savings

At the same time, Fiat Chrysler and PSA raised their estimate for the annual synergies Stellantis will achieve to €5bn, putting more pressure on Tavares to squeeze out efficiencies. The companies had previously said they would be able to extract €3.7bn in yearly savings without closing any plants.

The pandemic may have changed that calculus, though cuts will be hard to come by. Tavares will have to navigate the political cross-currents in France, Italy and the US, where the carmakers have deep national roots. He has tackled tough jobs before, leading the French carmaker back from the brink after taking over as CEO in 2014 and reviving Opel after acquiring it from General Motors (GM) in 2017.

As with other executives across the industry, Tavares and Elkann are responding to growing pressure to pool resources plugged into product development, manufacturing and purchasing to free up money for big bets on electric cars and self-driving systems. But being bigger isn’t necessarily reaping rewards. Tesla is now far more richly valued than VW, which is staging the biggest effort among the incumbents to electrify its vast fleet. GM has retrenched from many markets to focus on North America and China, while Renault and its alliance partner Nissan Motor are restructuring after racking up huge losses.

“The automotive industry has been chasing size and consolidation for years, but it’s been slower in coming than many would like to see,” Houchois said. “The question is whether GM, Toyota and Renault-Nissan have provided evidence that there may be limits to this strategy.”

With Reuters

Bloomberg

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