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Denials of VW-Fiat Chrysler merger, but the sense is no secret

Chrysler CEO Sergio Marchionne Speaks At The Brookings InstitutionChrysler CEO Sergio Marchionne Speaks At The Brookings Institution
Chrysler CEO Sergio Marchionne Andrew Harrer/Bloomberg—Getty Images

Curt denials by Fiat Chrysler and Volkswagen that they’re talking merger belie the forces pushing the two automotive companies toward each other. Are the forces strong enough to overcome some resistance to a combination?

VW is stumbling in the U.S.; acquiring Fiat Chrysler would immediately boost VW’s share of the U.S. vehicle market to 15 percent from the current 4 percent. Fiat Chrysler owns the Alfa Romeo luxury brand, which VW has openly admitted coveting. VW would gain the Ram pickup brand and Jeep, helping the German company towards its goal of world domination by 2018.

For Fiat Chrysler and its controlling Agnelli family, the advantage of selling to VW would be simple and straightforward: a big pile of money. The stock market values the company, according to its current capitalization, at about $12 billion. At least one analyst theorizes a buyout might cost VW $40 billion, including the assumption of Fiat’s debt.

“We believe a deal has a degree of industrial logic—and, perhaps more importantly, a load of emotional logic,” Bernstein Research analysts wrote in a report published on Thursday.

Manager Magazin, a German publication, said this week that Ferdinand Piech, the chairman of Volkswagen and a member of the company’s controlling shareholder, the Porsche family, had been in takeover discussion with Agnelli family, the controlling shareholders of Fiat. All involved denied the story’s accuracy—though in the early stages of big industrial mergers, the truth can sometimes be bent or stretched.

For some years, European bankers have concluded that the Agnellis are poised to exit the mass-market automobile business eventually, while hanging on to Ferrari and its F-1 racing team. A recapitalization that separated the Fiat auto company from other Fiat industrial properties set the stage for the merger with bankrupt Chrysler in 2009.

Fiat Chrysler, while not in immediate financial distress, isn’t particularly profitable and must raise substantial capital to fulfill its own ambitious growth plans. Later this year, a public share offering of newly-consolidated Fiat Chrysler Automobiles N.V. is expected to take place. That share offering could be a signal of support—or lack of it—from capital markets for FCA’s growth prospects.

Beyond the question of what advantage VW sees in owning FCA is one of whether it’s actually a good idea. According to Bernstein Research’s calculations, the cost of acquiring FCA would be dilutive to VW shareholders in the short term. That may not bother Piech so much, who at age 77 appears active if not spry. But he may be more eager than his fellow shareholders.

The Chrysler part of FCA has been down this road before with another German acquirer, Daimler AG. Daimler bought Chrysler in 1998 and then sold it to Cerberus Capital Management in 2007 after failing to realize its strategic vision. VW shareholders could be forgiven for deciding that they have seen this movie before want no part of FCA.

Until it becomes clear whether Piech is determined to proceed, and how quickly, VW still has plenty of work to do improving the brand’s North American presence. The FCA stock offering later this year could be a hint of things to come.