Binding agreement will establish world's fourth largest OEM and enable cost savings - but no plant closures are planned
18 Dec 2019 | 2808 Views | By Autocar Professional Bureau
Fiat Chrysler and Groupe PSA have signed a binding combination agreement providing for a 50:50 merger of their businesses to create the fourth largest global automotive OEM by volume and third largest by revenue with annual sales of 8.7 million units. The combined revenues will be nearly 170 billion euro(Rs 1,345,380 crore), with ...
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Fiat Chrysler and Groupe PSA have signed a binding combination agreement providing for a 50:50 merger of their businesses to create the fourth largest global automotive OEM by volume and third largest by revenue with annual sales of 8.7 million units. The combined revenues will be nearly 170 billion euro(Rs 1,345,380 crore), with recurring operating profit of over 11 billion euro (Rs 87,054 cr) and an operating profit margin of 6.6 percent, on a simple aggregated basis of the 2018 results.
The merger will deliver approximately 3.7 billion euro (Rs 29,258 crore) annual run-rate synergies with no plant closures resulting from the transaction. The synergies are expected to be net cash flow positive from the first year. This combined entity will leverage investment efficiency across a larger scale to develop innovative mobility solutions and cutting edge technologies in new energy vehicles, autonomous driving and connectivity
The combined balance sheet and high level of liquidity provide financial flexibility and an investment grade credit rating is expected. This also offers ample headroom both to execute strategic plans and invest in new technologies throughout the cycle. The gains in efficiency derived from larger volumes, as well as the benefits of uniting the two companies’ strengths and core competencies, will ensure the combined business can offer all its customers best-in-class products, technologies and services and respond with increased agility to the shift taking place in this highly demanding sector.
This will be underpinned by FCA’s strength in North America and Latin America and Groupe PSA’s solid position in Europe. The new Group will have much greater geographic balance with 46 percent of revenues derived from Europe and 43 percent from North America, based on aggregated 2018 figures of each company. The combination will bring the opportunity for the new company to reshape the strategy in other regions.
The efficiencies that will be gained from optimising investments in vehicle platforms, engine families and new technologies while leveraging increased scale will enable the business to enhance its purchasing performance and create additional value for stakeholders. More than two-thirds of run rate volumes will be concentrated on 2 platforms, with approximately 3 million cars per year on each of the small platform and the compact/mid-size platform.
These technology, product and platform-related savings are expected to account for approximately 40 percent of the total 3.7 billion euro in annual run-rate synergies, while purchasing - benefiting principally from scale and best price alignment - will represent a further estimated 40 percent of the synergies. Other areas, including marketing, IT, G&A and logistics, will account for the remaining 20 percent. These synergy estimates are not based on any plant closures resulting from the transaction. It is projected that the estimated synergies will be net cash flow positive from year 1 and that approximately 80 percent of the synergies will be achieved by year four. The total one-time cost of achieving the synergies is estimated at 2.8 billion euro (Rs 22,149 crore).
Those synergies will enable the combined business to invest significantly in the technologies and services that will shape mobility in the future while meeting the challenging global CO2 regulatory requirements. With an already strong global R&D footprint, the combined entity will have a robust platform to foster innovation and further drive development of transformational capabilities in new energy vehicles, sustainable mobility, autonomous driving and connectivity.
The merged entity board will comprise of 11 members, the majority of whom will be independent. Five board members will be nominated by FCA and its reference shareholder (including John Elkann as Chairman) and five will be nominated by Groupe PSA and its reference shareholders (including the Senior Non-Executive Director and the Vice Chairman). At closing the Board will include two members representing FCA and Groupe PSA employees. Carlos Tavares will be Chief Executive Officer for an initial term of five years and will also be a member of the Board.
Carlos Tavares, Mike Manley and their executive teams have a strong track record in successfully turning around companies and combining OEMs with diverse cultures. This experience will support the speed of execution of the merger, underpinned by the companies’ strong recent performances and already robust balance sheets. The merged entity will maneuver with speed and efficiency in an automotive industry undergoing rapid and fundamental changes.
The new group’s Dutch-domiciled parent company will be listed on Euronext (Paris), the Borsa Italiana (Milan) and the New York Stock Exchange and will benefit from its strong presence in France, Italy and the US.
Carlos Tavares, Chairman of the Managing Board of Groupe PSA, said: “Our merger is a huge opportunity to take a stronger position in the auto industry as we seek to master the transition to a world of clean, safe and sustainable mobility and to provide our customers with world-class products, technology and services. I have every confidence that with their immense talent and their collaborative mindset, our teams will succeed in delivering maximised performance with vigor and enthusiasm.”
Mike Manley, Chief Executive Officer of FCA, added: “This is a union of two companies with incredible brands and a skilled and dedicated workforce. Both have faced the toughest of times and have emerged as agile, smart, formidable competitors. Our people share a common trait - they see challenges as opportunities to be embraced and the path to making us better at what we do."
The merged company will include a number of high-profile car brands. The PSA Group owns Citroen, DS, Peugeot and Vauxhall-Opel, while FCA’s brands include Alfa Romeo, Chrysler, Fiat, Dodge, Jeep, Lancia, Maserati and Ram.
Completion of the proposed combination is expected to take place in 12-15 months, subject to customary closing conditions, including approval by both companies’ shareholders at their respective Extraordinary General Meetings and the satisfaction of antitrust and other regulatory requirements.