Fiat-PSA Merger Looks Like a Go—and the Italians Got the Better End of the Deal

Fiat Chrysler Automobiles and France’s PSA Group tentatively agreed on Thursday to one of the biggest merger deals in the history of the automotive industry as both companies grapple with an expensive push to develop lower-emission vehicles and the reality of stalling demand for new car purchases just about everywhere.

Judging by the market response, FCA made out ahead. Far ahead.

Shares in PSA Group, manufacturer of Peugeot, Citroen and Opel cars, tanked 12 percent following the news. FCA stock jumped as investors bet that the merger of equals meant PSA was in reality paying a premium to assume control over FCA.

Should the deal progress, the combined group would leapfrog rivals like General Motors, Ford and Hyundai-Kia to notionally become the fourth largest carmaker in the world behind Volkswagen, Renault-Nissan and Toyota with some 8.7 million vehicles sold annually.

In a joint statement, the duo immediately flagged the industry rationale, explaining the new entity could be quicker and more efficient in deploying its combined capital to meet the added challenges from connected, electrified, shared and autonomous mobility.

“This is probably the biggest merger deal since DaimlerChrysler,” Bernstein analyst Thanos Hadjiantonis told Fortune. “It’s by far the largest this decade.”

Jeep, Maserati and Alfa Romeo

While the larger of the two in terms of sales and revenue, the Italian carmaker suffers from an aging product line unable to, on its own, comply with the EU’s stringent new fleet emission targets that go into effect in 2020. Failure to comply means potentially steep fines, which is forcing automakers to step up their transition to a greater mix of hybrid, electric and plug-in models.

FCA’s most valuable asset is Jeep, which has profited from the global boom in SUVs. It also owns two storied premium brands in Maserati and Alfa Romeo. In addition, it offers a strong presence in North America that comes with an existing dealer network for when the French carmaker eventually launches its Peugeot brand there.

By comparison, PSA has a stronger product pipeline and better control on production costs thanks to two high-volume mixed architecture platforms it deploys. Such flexible production models are capable of accommodating the rapid build of anything from a subcompact to a midsize vehicle powered by a combustion engine, a battery or some combination of the two.

In the duo’s core European market, the deal would create a major counterweight to Volkswagen Group. The combined group which sells nearly as many cars as VW and control more than a fifth of the overall car market.

VW’s finance chief refuted speculation that a combined PSA-FCA rival with a strong foothold in the U.S. might force it to consider closer capital ties with new partner Ford. “To be clear, no, I don’t see any impact from the talks between PSA and FCA either on Ford or our strategy otherwise,” Frank Witter said in a media call on Wednesday shortly after the news of the pending deal first emerged.

“FCA was desperate”

The industry’s greatest proponent of consolidation, FCA has been a bride in search of a willing groom for years. Advances were however rebuffed time and again by rivals like General Motors, which was repelled by its lack of investment in new product and technologies and the weak equity of its brand portfolio led by titular Fiat and Chrysler.

In a more recent case this summer, FCA itself called off wedding plans with Renault after realizing that marrying into the family would mean it was stuck with a meddling French state as an in-law.

“FCA was desperate. They have big issues to solve and alone they could not do it,” said Juan Felipe Munoz-Vieira, a senior analyst at industry research group JATO Dynamics, describing PSA as a natural partner. “If it wasn’t Renault, it was going to be someone else and there are very few options left.”

Indeed, the two deals are in their broad brushstrokes so similar that FCA could almost recycle its plans: a side-by-side comparison indicate both proposals would create an entity with 8.7 million vehicles sold, revenue of 170 billion euros ($189 billion) and operating profit of over 10 billion euros with 80 percent of the savings achieved after four years. There would also be an even split of 50-50 ownership structure presided over by an 11-person governance board.

The one major difference is the overall synergy savings target: whereas FCA estimated savings of more than 5 billion euros for the now aborted Renault deal, the new deal with PSA would come in a bit lower, at closer to 3.7 billion euros.

“The best thing about this merger is they will dominate two of the most profitable segments in Europe in SUVs and light commercial vehicles, but there are issues that the merger doesn’t solve, like their very poor presence in China,” said JATO’s Munoz.

Neither group has succeeded to gain a foothold in China and PSA’s finance chief admitted last week that its problems in the region run so deep it barely matters how the Chinese market performs as it first line of business is to sort out the operations there.

In Tavares, FCA finds its new Marchionne

PSA Group CEO Carlos Tavares, who seems to have fixed the Opel business he acquired in August 2017, is set to run the company and serve as the unofficial sixth board member for PSA.

He could now go down in history for saving not one carmaker like former mentor Carlos Ghosn, or even two like the late-FCA CEO Sergio Marchionne, but three in succession: PSA, Opel and FCA.

“In our view Carlos Tavares is probably the best automotive CEO in the world at the moment given what he managed to achieve at Peugeot. When he took over in 2014 it was effectively a bankrupt company and now it’s making some of the best margins globally,” said Hadjiantonis. “If there’s someone out there that can manage this level of complexity, it’s probably him.”