FCA/PSA: stellar ambitions

Tiffany’s broken engagement to luxury giant LVMH is a sign of the times. Deal terms that made sense before the pandemic now look unbalanced. So Fiat Chrysler shareholders should be relieved by the modest revision of the terms of its €50bn merger with the more resilient PSA, owner of Peugeot. The Italian-American auto group’s shares went up 11 per cent on Tuesday. Those of the French company bounced 4 per cent as well, helped by the statement’s optimistic tone.

The changes mean that more cash is retained in the business to help it withstand the fallout from the pandemic. The dividend due to be paid to FCA shareholders has been cut from €5.5bn to €2.9bn. PSA will now give half of its shares in the parts group Faurecia to FCA investors. As such, the balance of the deal is broadly unchanged, with PSA shareholders contributing 54.1 per cent of value in return for half the combined group, says Jefferies.

Some PSA shareholders thought the deal overly generous to the Italian company, even before the the exceptional performance posted by the French group in the first half, when it posted a €595m profit. But there is strong logic behind the tie-up between FCA and PSA. Though billed as a 50/50 deal, it is better viewed as a takeover, for which a premium is justified.

Expected cost savings have risen from €3.7bn to more than €5bn. That is not based on plant closures but limiting any duplication in technology investment. Also, expect cost benefits in areas such as procurement. Taking into account €4bn of implementation costs, the net present value of those savings is worth €8 to €10 for each PSA share, says UBS. With the shares down by a third to less than €17 since the deal was announced, that implies big potential upside.

There are still grounds for caution. Though nervousness about public transport has supported car sales in the pandemic, they will inevitably be hit hard by any economic downturn. But PSA and FCA are confident enough to talk about a potential €500m payout from each company before the deal closes in the first quarter of 2021.

Both sides expect “extraordinary” value creating potential, per usual. PSA’s record though suggests that is not an idle boast. If achieved, the group’s chosen name Stellantis — from the Latin for “to brighten with stars” — will not look so vainglorious after all.

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