Is FCA/PSA deal in danger?
The giant fusion deal between Fiat Chrysler Automobiles (FCA) and the PSA Group risks turning turtle. Analysts still think that it can work, but they are questioning the 50/50 deal. An equilibration even less justified since FCA has a state-certified loan of €6,5 billion.
The deal is also in a critical phase because of the Phase 2 investigation by the European Commission. This means an additional delay until (at least) November, where CEO’s Mike Manley (FCA) and Carlos Tavares (PSA) hoped for a green light end of June.
The procedure is less important
Discussions about procedures seem rather futile now that the market has changed so drastically because of corona and altered financial profiles. “The gap in operational efficiency has widened, the scheme of a fusion between equals is even less justified than before,” says Frédéric Rozier of Mirabaud.
Although the market has recovered faster for FCA, also due to a far more critical presence in China, analysts see a regress of 21% for FCA this year, and 18% for PSA.
The most recent loan of more than 6 billion euros for FCA, guaranteed by the Italian state, changes the financial status of the group. Already at the beginning of the talks between FCA and PSA, analysts had their doubts about the fusion between equals, too positive for FCA.
Now corona has wakened everybody. Analysts like Bernard Julien, automotive expert at the University of Bordeaux, has already analyzed the European market and noted that its 2018 level was too high. The lower 2015 market is the one that is foreseeable in the future.
This means that production capacity is key. And for a long time already, FCA has been the Europen champion in overcapacity of its plants. A year ago, the capacity use of the FCA plants turned around 60%, far too low while the market was still high.
But according to Bernard Julien, there is another problem: “The recent growth (and problems) of VW have proven that four generalist brands in your portfolio are the maximum. But an FCA/PSA fusion makes for seven…”
So, there will have to be choices, and certain brands could disappear. Bernard Julien is thinking about Alfa Romeo, an iconic brand but also one that is in particularly bad weather lately.
A political dimension
If brands have to disappear, plants will be closed. None of the two governments concerned is ready to accept this. Moreover, the French state is concerned about a too important influence of the Elkann/Agnelli family in the fusion company.
But PSA is in a bad position for negotiation, being too dependent on the European market. “Even when FCA is far less profitable, it weighs twice as much in turnover, and is far more present in the other big markets like the US and China,” says Frédéric Rozier.
Fusion or cooperation?
Fusions or merger imply a lot of things. That’s why a lot of companies prefer all types of cooperation. The Alliance between Renault, Nissan, and Mitsubishi is an example of an intense one.
But there are other ones, like the growing ‘romance’ between VW and Ford or the cooperation between a lot of manufacturers on certain projects. We’re thinking about Toyota and Suzuki, or Renault and Daimler.
At FCA and PSA, they’ve figured out that such cooperations don’t lead to the €3,7 billion of synergies a fusion can create. Last week, PSA has reacted to the rumors around the fusion. It has stated that the fusion will be going on as planned. To be continued.