Fall­out from Fiat-Peu­geot

Car com­pa­nies merger could spell doom for Chrysler

Chicago Tribune (Sunday) - - BUSINESS - By Tom Kr­isher and Colleen Barry Tom Kr­isher re­ported from Detroit.

MI­LAN – Au­to­mo­bile shop­pers across the globe are likely to see fewer ve­hi­cles and brands if the merger of Fiat Chrysler and France’s PSA goes through, but the new com­pany will be big enough to com­pete in a fast-chang­ing busi­ness that re­quires vast sums of money to de­velop au­ton­o­mous and elec­tric ve­hi­cles.

The two com­pa­nies an­nounced the merger Thurs­day that, if fi­nal­ized, will cre­ate the world’s fourth-largest auto com­pany, worth $50 bil­lion. But PSA will have the up­per hand in the deal, with its cost-cut­ting CEO Car­los Tavares in charge and PSA con­trol­ling the new com­pany’s board.

Both com­pa­nies still have to agree on fi­nal pro­vi­sions, but the deal could close by the end of the year.

Tavares, who used to run Nis­san in the Amer­i­cas and knows the U.S. mar­ket well, will not shy away from trim­ming un­prof­itable mod­els and brands. He’s cred­ited with turn­ing around the Opel and Vaux­hall brands in Europe, peren­nial money losers which PSA ac­quired from Gen­eral Mo­tors two years ago.

Bern­stein an­a­lyst Max War­bur­ton wrote in a note to in­vestors that he’s con­fi­dent Tavares can pull off com­bin­ing the com­pa­nies.

“Tavares’ play­book has been to take on loss-mak­ing busi­nesses and fix them, rapidly,” War­bur­ton wrote. “We be­lieve he can achieve some­thing sim­i­lar at Fiat in Europe.” He called Tavares the “world’s most fru­gal auto ex­ec­u­tive.”

Fiat Chrysler CEO Mike Man­ley was left with­out a ti­tle in the com­bined com­pany. He’ll take a se­nior lead­er­ship po­si­tion, the com­pa­nies said, but his role in the new busi­ness was not im­me­di­ately clear.

Tavares will hold the 11th seat on the new com­pany’s oth­er­wise evenly split board, giv­ing con­trol of it to PSA, al­though Fiat Chrysler’s chair­man, John Elkann, will be­come chair­man of the new com­pany.

Be­fore the deal closes, FCA will pay its share­hold­ers a 5.5 bil­lion euro ($6.1 bil­lion) premium, rais­ing ques­tions about whether the new com­pany will be sad­dled with too much debt. Jef­fries an­a­lyst Philippe Hou­chois es­ti­mated that Peu­geot is pay­ing a hefty 32% premium to take con­trol of Fiat Chrysler.

In the U.S., the deal brought back bad me­mories of 1998, when Ger­many’s Daim­ler AG and Chrysler an­nounced what was billed as a “merger of equals.” It turned out to be a takeover that re­sulted in mas­sive cul­ture clashes be­tween Daim­ler, which owns Mercedes, and Chrysler. The com­pa­nies never meshed, and Daim­ler des­per­ately jet­ti­soned the U.S. au­tomaker in 2007 to a pri­vate eq­uity firm that drove it into a gov­ern­ment-funded bank­ruptcy.

“You just sort of scratch your head and go, ‘Oh my God, it’s hap­pen­ing again,’” Bud Liebler, who was Chrysler’s mar­ket­ing chief when Daim­ler took over, said of the PSA deal.

But Liebler says he can’t see PSA mess­ing too much with the U.S. op­er­a­tions be­cause they’re per­form­ing solidly, largely due to sales of the pop­u­lar Jeep brand and prof­itable Ram pickup trucks.

“I can’t imag­ine why you would want to screw up some­thing that’s been work­ing so well,” he said.

Tavares has am­bi­tions of sell­ing PSA ve­hi­cles in the U.S., but Gart­ner an­a­lyst Mike Ram­sey said that may come by just re­la­bel­ing the ve­hi­cles as Fiat or Chrysler mod­els.

PSA and Fiat Chrysler pre­dict sav­ings of 3.7 bil­lion eu­ros ($4 bil­lion) from the deal, which they ex­pect to achieve with­out any fac­tory clo­sures.

Much of that sav­ings would come from shar­ing re­search and de­vel­op­ment costs on ve­hi­cle “plat­forms,” the un­der­pin­nings on which cars, trucks and SUVs are built. Plat­forms nor­mally cost $1 bil­lion each to de­velop, and con­sol­i­dat­ing them is where most of the sav­ings would come.

Ram­sey doesn’t fore­see an im­me­di­ate im­pact when the com­pa­nies com­bine, but said there will be in three or four years as new ve­hi­cles are de­vel­oped.

“They need to sit down and fig­ure out where are their over­lap­ping plat­forms and how that prod­uct is go­ing to merge over time,” he said.

In the U.S., Tavares won’t be afraid to go af­ter un­der­per­form­ing mod­els and brands, said Ram­sey. A top can­di­date for elim­i­na­tion would be the Chrysler brand, which has dwin­dled to only two mod­els, a mini­van and a car, he said.

Both com­pa­nies will save money later as more plat­forms are con­sol­i­dated and they jointly de­velop bat­tery pow­ered ve­hi­cles, he said.

Fiat Chrysler, mean­while, con­tin­ues to strug­gle in Europe, where ex­ec­u­tives have ac­knowl­edged that the model lineup is tired and where plans to re­launch the premium and lux­ury brands Alfa Romeo and Maserati have so far foundered.

Man­ley an­nounced as part of third-quar­ter earn­ings Thurs­day plans to re­vamp launches for the strug­gling Alfa Romeo brand, which in­cluded a 1.5 bil­lion-euro write-off for the plat­form used for the Stelvio and Giulia mod­els, since they can’t be con­verted eas­ily to elec­tric or hy­brid ver­sions.

He also ac­knowl­edged that Fiat had re­lied too much on tiny city cars and needs to ex­pand into the sub­com­pact seg­ment that it has aban­doned. PSA has pop­u­lar en­tries in that seg­ment with its Opel and Peu­geot brands.

Fac­to­ries in Italy are run­ning at less than 60% ca­pac­ity, which re­mains a con­cern for Ital­ian unions and politi­cians. Fiat re­mains one of the coun­try’s largest pri­vate sec­tor em­ploy­ers with nearly 60,000 work­ers.

“When you do a merger of this type, surely there is a win­ner and that is the share­hold­ers,” said Francesco Zir­poli, di­rec­tor of the Cen­ter for Au­to­mo­tive and Mo­bil­ity In­no­va­tion at Venice’s Ca’ Foscari Univer­sity.

He said the merger puts at risk Ital­ian en­gi­neer­ing brains based in Turin, which in a new com­pany would over­lap with en­gi­neers at PSA head­quar­ters in Paris.

MARCO BERTORELLO/GETTY-AFP

Fiat Chrysler’s merger with France’s PSA, if fi­nal­ized, will cre­ate the world’s fourth-largest auto com­pany.

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