The Case For Merging Fiat Chrysler (NYSE:FCAU) and Peugeot Group (EPA:UG)

By David Fisher
FCA PSA Merger

Disclosure: The author of this report has a long position in Fiat Chrysler Automobiles NV (NYSE:FCAU; IM: FCA) and General Motors Corp. (NYSE:GM). Positions can change at any time without notice.
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Overview

Recent media reports suggest the CEO’s of Fiat Chrysler Automobiles NV (FCA; BIT:FCA; NYSE:FCAU) and Peugot S.A. (PSA; EPA:UG) may investigate merging the two firms. We believe such a merger would create a company with meaningfully improved scale, earnings diversity, and cost competitiveness. The combination would create a global-scale manufacturer with favorable market share positions in North America, Europe, and Latin America.

While some industry participants (including FCA’s former CEO – Sergio Marchionne) have suggested FCA should merge with a US-based entity – most notably General Motors – we believe such a combination might face antitrust issues, particularly in the pickup truck space. In light of this, a PSA-FCA merger likely makes more sense at this time.

Strategic Rationale

Market share and scale

PSA and FCA have geographic footprints which would be highly complimentary, in our view. The combined entity would be a meaningful player in three geographic regions with market share above 10% in EMEA, Latin America, and NAFTA:

PSA Market Share; FCA Market Share; FCA-PSA Combined Market Share

The improved scale of the combined entity is a key reason for pursuing such a merger given that automotive companies have difficulty achieving acceptable returns on capital in regions where they are sub-scale. For example, FCA lost close to 300 million euros in Asia in 2018 largely because it lacks the scale to compete effectively in the region.

On a combined basis, PSA and FCA produced more than 8 million vehicles in 2018:

FCA shipments; PSA shipments; FCA-PSA shipments

This production volume would position the post-merger company as one of the largest vehicle manufacturers (by production volume) globally:


Source: Company reports

We believe the merged entity would have sufficient scale to operate profitably in most regions,  reducing the company’s dependence on any particular region and thereby bolstering its overall business profile.

Financial Rationale

Cost Savings

PSA’s acquisition of Opel in 2017 illustrates the potential financial benefits of consolidation. PSA aims to achieve annual savings of 1.7 billion Euros by 2026 by leveraging synergies in purchasing, R&D, manufacturing, SG&A, and capital expenditures. The results to-date from the PSA-Opel consolidation have been very positive, and we would expect a similar situation if FCA and PSA were to merge.

Specifically, we believe a merged entity could achieve meaningful research & development (R&D) and capital spending savings given that there is likely significant overlap in key programs such as electrification and infotainment. FCA and PSA combined spent almost 7 billion euros on R&D in 2018:

R&D expense (Million Euros – incl. capitalized expenses
FCA 3,914
PSA 3,051
Combined 6,965

In addition, FCA and PSA have an opportunity to reduce costs through shared vehicle platforms – common components that can be used to create multiple vehicles under different brands. Both PSA and FCA have pursued platform consolidation in the past to leverage their development costs and capital expenditures over a larger number of vehicles. Notably, PSA aims to massively reduce its vehicle platforms to 2 from 9 and its powertrain families to 4 from 10 by 2024 ( see slide 13 of Opel/Vauxhall Pace Plan! Presentation). We believe a merged entity could achieve meaningful savings by utilizing a core set of vehicle platform/propulsion technologies.

Summing it up

In summary, we believe a merger of FCA-PSA makes strong strategic and financial sense. The combined entity would have favorable market share positions in several regions and would benefit from increased scale and cost competitiveness.