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PSA and Fiat Chrysler unveil merger of equals

The merger would be achieved via the creation of a parent company in the Netherlands in which the shareholders of each current firm holding half.

This combination of file pictures created on 31 October 2019, shows a Chrysler logo seen at the 2016 Washington Auto Show on 27 January 2015 in Washington, DC and a picture of the logo of Italian automaker Fiat on 12 January 2017 in Saluzzo, near Turin. Picture: AFP

PARIS - Peugeot-maker PSA and Fiat Chrysler unveiled Thursday their plan for a 50-50 merger that aims to create the world's fourth-largest car manufacturer, but quickly came under pressure to preserve jobs.

With automakers needing to cut costs as the global car market slows and at the same time invest heavily in developing cleaner vehicles, the French and US-Italian firms said their tie-up would generate 3.7 billion euros in annual savings.

The boards of PSA and Fiat Chrysler (FCA) backed the plan on Wednesday that would result in a company with combined sales of nearly 170 billion euros ($190 billion) per year and 11 billion euros of operating profits, with negotiations continuing to resolve all the details.

The tie-up would leapfrog the carmakers into fourth largest in terms of sales behind Volkswagen, Renault-Nissan-Mitsubishi and Toyota, and would combine a host of well-known brands from Alfa Romeo, Jeep and Dodge to Citroen, Opel and Vauxhall.

'COMPELLING LOGIC', COST SHARING

The boards of both carmakers "both share the conviction that there is compelling logic for a bold and decisive move that would create an industry leader with the scale, capabilities and resources to capture successfully the opportunities and manage effectively the challenges of the new era in mobility," said the statement.

The merger would be achieved via the creation of a parent company in the Netherlands in which the shareholders of each current firm holding half.

The Dutch-based parent company would have balanced representation with FCA's John Elkann as chairman and PSA's Carlos Tavares as CEO and member of the board.

While investors cheered when the automakers first confirmed their talks on Wednesday, with Fiat Chrysler shares rising 9% in Milan and PSA shares adding 4%in Paris, the reception to Thursday's details was quite different.

PSA shares fell over 13% while those in Fiat Chrysler jumped 8% in Milan.

Daniel Larrouturou at asset management firm Dom Finance said the reaction of PSA shareholders was due to the fact that its market capitalisation is larger than that of Fiat Chrysler.

"With a 50-50 merger, Peugeot is technically buying Fiat and offering a bonus to its shareholders," he said. "The market is taking this into account and consequently adapting the share price."

VIGILANT ON JOBS

While the companies said a definitive deal could be reached in the coming weeks, a successful outcome is not guaranteed.

Fiat Chrysler tried to merge with PSA's French rival Renault earlier this year, but the deal was scuppered in part by opposition from the French government, which owns stakes in both PSA and Renault.

For the moment, the French government has signalled its support for the merger, but Economy Minister Bruno Le Maire warned we "will remain particularly vigilant on the industrial footprint in France, where decision making will be located, and promises by the new group to create in Europe the infrastructure to build electric batteries" needed for the shift to new vehicles.

Italian PM Giuseppe Conte voiced similar concerns, saying "the important thing is guaranteeing employment and investment levels", accoring to the Italian news agency AGI.

The carmakers said the 3.7 billion in projected annual savings was calculated without any factory closures.

French unions said they had received assurances that there wouldn't be factory closures, and IG Metall, which represents workers at Opel's factories in Germany, noted PSA had guaranteed jobs there through July 2023 when it took over the firm.

Unite, which represents workers at PSA-owned Vauxhall factories in Britain, said "merger talks combined with Brexit uncertainty is deeply unsettling for Vauxhall’s UK workforce, which is one of the most efficient in Europe."

SIZE MATTERS

The merger plan comes as the auto manufacturing sector - which accounts for 5.7% of global GDP and 8% of goods trade - shrank by 1.7% last year by volume of vehicles produced, according to the IMF.

A tie-up into a bigger firm would offer both companies advantages.

"FCA could remain independent as could PSA but obviously they lack the scale of some of their competition which puts them at a disadvantage," said Ian Fletcher, an automotive analyst at market research firm IHS Markit.

Savings could come from sharing certain car parts and designs as well as research and development costs as carmakers strive to meet new emissions standards in Europe as well as work on electric and autonomous vehicles.

A merged company "would likely be able to hone the business outside of their key North American and European markets to leverage the best parts, as well as potentially create new opportunities," added Fletcher.