Fiat Chrysler (NYSE:FCAU)
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1 Month : From May 2019 to Jun 2019
By Nick Kostov, Sean McLain and Eric Sylvers
Fiat Chrysler Automobiles NV has proposed a merger with French rival Renault SA, a move that if completed would create the third-largest auto maker by production and scramble the pecking order of the global automotive industry.
Fiat Chrysler said the combined business would be 50% owned by its shareholders and 50% by Renault shareholders with a "balanced governance structure." The Italian-American car giant, which in addition to its namesake Fiat also sells the popular Jeep and Ram truck brands, said the majority of the board would be independent. Renault said it had agreed to study the proposal, but gave no timetable for a decision.
The deal envisions Renault Chairman Jean-Dominique Senard as chief executive of the combined company, according to a person familiar with the matter. John Elkann, the scion of the Agnelli family that controls Fiat Chrysler, would take the chairmanship, according to this person. Shares in Renault rose 14% in early European trading, while Fiat shares were up more than 10%.
If Renault and Fiat Chrysler consummate a deal, it would create a car company with a combined market value of about $37 billion, based on the two companies' share price on Friday, before the proposal's disclosure early Monday. A combined company would also have annual vehicle production of almost nine million passenger cars and light trucks.
Such a combination would rank behind just Volkswagen AG and Toyota Motor Co. and ahead of General Motors Co. Including Renault's alliance partners, Nissan Motor Co. and Mitsubishi Motors Corp., group output would swell to around 15 million, far ahead of the pack.
Fiat Chrysler said its proposal came after an initial period of discussions with Renault to identify products and markets where they could collaborate to better meet the expensive challenge of electric vehicles, self-driving cars and in-car connectivity.
Fiat Chrysler said the two companies could take advantage of complementary market-segment and geographic strengths. Fiat Chrysler has a strong U.S. presence, where Renault is absent, and would bring its SUV and truck brands into the fold. It also owns luxury brand Maserati. Renault's lower-cost and mass market brands have a strong presence across Europe, Russia, Africa and the Middle East.
Before a deal closes, Fiat Chrysler is proposing that its shareholders receive a dividend of EUR2.5 billion ($2.8 billion) to mitigate the disparity between the market value of the two companies. That ensures any deal doesn't end up being a takeover of Renault by Fiat Chrysler and the Agnelli family, its controlling shareholder. On Friday, Fiat Chrysler had a market value of $20 billion, while Renault was valued at about $17 billion.
Fiat Chrysler said the deal will eventually deliver more than EUR5 billion in annual combined cost savings, mainly from sharing vehicle platforms and engineering resources and cooperating in areas such as R&D. It said these cost cuts weren't based on plant closures -- a politically charged issue in both France and Italy where governments have a history of intervention.
A French official said the government will evaluate the final proposal with an open mind, but will be "particularly vigilant" on how such a deal affects jobs at the auto makers. After Fiat Chrysler promised early Monday that its proposal wouldn't trigger plant closures, Matteo Salvini, an Italian deputy prime minister, called a tie up a "brilliant and future-oriented operation."
The proposed deal would align the voting rights of the Agnelli family and the French government with their respective economic shareholdings -- solving a key stumbling block in negotiations. For instance, the Agnellis own 29% of Fiat Chrysler, but control 44% of its voting rights. In a combined company, the family's stake and voting rights would both drop to 14.5%. The French government's stake in the combined entity would be 7.5%, down from 15% currently.
The deal proposes a combination through a Dutch-based holding company. Fiat Chrysler didn't disclose where the new company's operational headquarters would sit. Renault is based in Paris. Fiat Chrysler has long been run out of both Turin, Italy, and Detroit.
Complicating any deal is a 20-year-old partnership between Renault and Nissan, in which they share technology and vehicle parts. Renault owns 43.4% of Nissan, while Nissan owns 15% of Renault. The Renault-Nissan relationship has come under strain as the two sides debate whether to overhaul the cross-shareholding arrangement and how to make joint decisions on future models and technologies.
Those differences have been exacerbated by the arrest last year of auto titan Carlos Ghosn, who forged the alliance. Mr. Ghosn has been indicted by Tokyo prosecutors on charges including diverting Nissan money for personal gain. He says he is innocent and was released on bail last month.
Nissan CEO Hiroto Saikawa told Japanese media Monday that he is "open to any forward-looking discussions to strengthen the alliance." Mr. Saikawa, who declined to say whether he was notified of the merger proposal, is expected to attend a previously scheduled meeting with top executives from Renault on Wednesday in Japan.
There is no guarantee Fiat and Renault will reach an agreement. They are both considered symbols of national industry in their home countries, and national pride has often kept car makers across Europe independent. But as demand slows for new cars, companies are more closely weighing the advantages of global scale.
Renault's alliance with Nissan, which Mitsubishi joined later, was once held up as an example of how to address the high costs of developing and building new cars, without the perils of a full merger. Sharing vehicle platforms and engineering resources, and cooperating in areas such as procurement can help car makers cut costs.
Apart from the recent squabbling related to Mr. Ghosn's departure, the billions of dollars in savings that alliance members claim come from synergies have failed to translate into higher profitability than some of their regional peers.
Renault approached Nissan last month to propose a full blown merger between the two, but was rebuffed. A merger between Fiat and Renault would shelve those plans, said a person familiar with the Fiat-Renault deal.
"Nothing is going to happen on the alliance side for a while," the person said. "Nissan has to get its house in order first."
Profit at Nissan is expected to plunge this year as the Japanese auto maker seeks to overhaul its business in the U.S.
--Giovanni Legorano contributed to this article.
Write to Nick Kostov at Nick.Kostov@wsj.com, Sean McLain at firstname.lastname@example.org and Eric Sylvers at email@example.com
(END) Dow Jones Newswires
May 27, 2019 07:18 ET (11:18 GMT)
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