Please ensure Javascript is enabled for purposes of website accessibility

Why Fiat Chrysler Automobiles Might Merge With Peugeot

By John Rosevear – Updated Oct 30, 2019 at 12:18PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It's all about scale.

Fiat Chrysler Automobiles (FCAU) may have found a dance partner: FCA is in discussions with PSA Group, the holding company of French automaker Peugeot (PUGOY), about a merger that could create a $50 billion auto giant.

The talks, first reported by The Wall Street Journal and subsequently confirmed by both automakers, come as investors are pressuring global automakers to reduce costs amid a global auto-sales slowdown. 

Earlier this year, FCA explored the possibility of a merger with PSA rival Renault, but those talks ended without a deal.

Why would these companies want to merge?

A number of challenges are putting pressure on automakers' costs:

  • Tightening emissions regulations, particularly in Europe.
  • Aggressive spending on future technologies that may be required to stay competitive, including electric-vehicle drivetrains and self-driving systems.
  • Excess manufacturing capacity -- or put another way, factories running below full capacity, which reduces profits.
  • Global auto sales are slowing, as China works through a slump and mature markets including the U.S. and Europe have stalled after long growth cycles.

A merger could help both companies address all of those challenges by increasing economies of scale, including sharing of parts and platforms and combining research and development efforts. 

A red Jeep Wrangler SUV on a rocky hill.

FCA is best known for trucks and SUVs, notably its iconic Jeep brand. Image source: Fiat Chrysler Automobiles.

More specifically, FCA and PSA have businesses that complement each other fairly well. 

  • FCA generates about two-thirds of its revenue in the United States, where PSA has only a small presence. 
  • PSA is strongly focused on Europe, where FCA has lost ground in recent years.
  • FCA is strong in pickups and SUVs, and has been expanding its efforts in commercial vehicles -- all high-margin product segments where PSA is relatively weak.
  • PSA is strong with smaller vehicles and has good hybrid and battery-electric technology, which FCA lacks. 

What would the deal look like?

It's hard to say for sure, as talks are said to be "fluid." One possibility under discussion, according to the Journal's report, is a stock swap that results in a "merger of equals" with no cash changing hands. 

Under that proposal, the combined company would be led by Peugeot's well-regarded CEO, Carlos Tavares. John Elkann, FCA's chairman and the leader of the Agnelli family (which founded Fiat and controls FCA), would become chairman of the new company, according to the report. 

A red 2020 Peugeot 208, a small four-door hatchback.

PSA's strength is in small cars and green technologies: The new Peugeot 208 comes in battery-electric and internal-combustion versions. Image source: PSA Group.

Are these companies really equals?

FCA is a bit larger than PSA by sales, but they're not far apart. 

Automaker 2018 revenue 2018 vehicle sales Employees as of Dec. 31, 2018
Fiat Chrysler Automobiles 110 billion euros ($122 billion) 4.8 million 199,000
PSA Group 74 billion euros 3.9 million 211,000

Source: FCA, PSA Group.

What could stop this deal?

PSA's major shareholders include the French government, with a stake of roughly 12%, as well as Chinese automaker Dongfeng Motor Group (DNFGF -8.11%) and the Peugeot family. 

The Peugeot family is not likely to be an obstacle, but the French government may well block the deal, or at least demand assurances that the combined company won't close facilities or cut jobs in France. Dongfeng's presence as an investor could trigger concerns from the U.S. government, given the ongoing trade tensions between the U.S. and China. 

The Italian government and the unions that represent workers at FCA's factories in Italy will also have concerns about job losses and may demand assurances as well. 

When will we know more?

Reports suggest that things are moving quickly. FCA's board of directors will meet late on Wednesday to discuss the proposal, according to a Reuters report. It is set to report its third-quarter earnings on Thursday morning; it's possible that a deal could be announced then.

John Rosevear has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.