Fiat Chrysler Faces Rough Road Before PSA Merger

By Eric Sylvers

Fiat Chrysler Automobiles NV is banking on a planned $50 billion merger with Peugeot maker PSA Group to help it catch up with rival car companies. But in the year or so until the deal gets done, the Italian-American car maker risks falling farther behind.

The manufacturer of Chrysler cars and Ram trucks faces falling sales volumes around the world, including a small decline in North America, where it generates more than 90% of profit. Once-steady cash cow Jeep is stumbling, luxury brand Maserati is cratering, the umpteenth attempt to relaunch Alfa Romeo has fallen flat and Fiat sold 7% fewer cars in Europe last year compared with 2018. And the cost of being an electric-car laggard is rising.

When the merger is complete, PSA CEO Carlos Tavares will take the same role at the new group. His success with the Peugeot and Opel brands earned him a reputation as a turnaround expert and many analysts are betting he can fill that role once he gets his hands on Fiat Chrysler.

The history of auto industry megamergers is checkered and Mr. Tavares must solve a host of issues, including excess capacity in Europe and low exposure to Asia. Yet analysts have so far given him the benefit of the doubt.

Beyond Fiat Chrysler's highly profitable North American business, "most of the rest of it is a headache," Bernstein analyst Max Warburton wrote after the company released third-quarter results. "You know it, I know it and Tavares knows it. But Tavares has a plan."

Yet Fiat Chrysler has to go it alone for the next 12 to 15 months, the time frame given for completing the deal when terms were announced in December. And if things deteriorate further this year, Mr. Tavares could find himself facing a more difficult challenge.

Fiat Chrysler declined to comment or make Chief Executive Mike Manley available for an interview. On an earnings call in October with analysts, Mr. Manley said steps were being taken to improve profitability.

PSA declined to comment or make Mr. Tavares available.

Fiat Chrysler is slated to report fourth-quarter results on Feb. 6. Through the first nine months of 2019, net profit from continuing operations fell 48% to EUR1.1 billion ($1.2 billion). Adjusted operating profit, which strips out one-time items, fell 7.2%, to EUR4.6 billion.

To be sure, Fiat Chrysler continues to churn out robust profit in North America, where its 10.6% operating profit margin in the third quarter beat Ford Motor Co. by 2 percentage points and was within striking distance of General Motors Co. Sales of high-margin Ram trucks rose 18% in the region in 2019, the 10th straight yearly increase.

Brisk sales of Jeep sport-utility vehicles helped sustain the company for the past five years, but volume fell 5% in 2019 in the U.S., the brand's most important market. Fiat Chrysler's Belvidere Assembly Plant near Chicago is currently in a two-week shutdown to work through excess inventory of the Jeep Cherokee. Last year, Jeep volume also retreated slightly in Europe, the first decline since 2013.

Meanwhile, Maserati suffers from a limited offering of models and a dependence on sedans at a time when consumers are increasingly turning to SUVs. The brand lost about EUR160 million through the first nine months of last year, as volume plunged more than 40%.

Alfa Romeo has repeatedly missed volume targets despite Fiat Chrysler's investments to boost the brand's appeal through new models and marketing. Sergio Marchionne, Fiat Chrysler's longtime CEO until he died in 2018, set a target to sell 400,000 Alfa Romeos in 2018, but about 170,000 were actually sold that year.

Fiat Chrysler in recent years has skimped on investing in electric vehicles. The shortfall will be partially addressed with the merger, as PSA has developed electric-vehicle technology.

Fiat Chrysler is meeting European Union emissions rules in part through a deal that pools its vehicles' carbon-dioxide emissions with Tesla Inc.'s. While Fiat Chrysler hasn't said how much it is paying Tesla, investment bank Jefferies estimates it at between EUR600 million and EUR700 million for this year.

All the challenges could make it difficult for Fiat Chrysler to meet its target for adjusted operating profit this year of more than EUR7 billion, which Jefferies has called ambitious. That target, given in October, was a big step back from the goal it set in mid-2018 for this year, as much as EUR10.4 billion.

Car sales softened in the U.S. in 2019. They have also declined in China the past two years, making it harder for Fiat Chrysler to make headway in the world's largest auto market, where it once had big ambitions for Jeep. Europe's already-tightened emissions requirements are also likely to become even more stringent as the EU introduces a new climate law by March.

The car industry is entering "a multiyear profit desert that is arriving just when the sector seems to already be in a cyclical recession," says Dario Duse, a managing partner at AlixPartners, a consulting firm that specializes in corporate turnarounds.

For now, many analysts are betting Mr. Tavares will be able to fix Fiat Chrysler, whose shareholders will receive a EUR5.5 billion special dividend before the merger closes, opening the executive opening the executive to criticism over the terms of the deal.

"Has the world's most frugal auto executive ever overpaid for anything?" wrote Bernstein's Mr. Warburton. "If Tavares has agreed to merger terms that look to value FCA more highly than PSA...maybe there is a reason?"

Write to Eric Sylvers at eric.sylvers@wsj.com

(END) Dow Jones Newswires

January 26, 2020 08:14 ET (13:14 GMT)

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