The proposed merger between Fiat Chrysler Automobiles FCAU and PSA Group PUGOY has been recently approved by shareholders of both companies. The deal is expected to wrap up by Jan 16, post which the combined entity — which will be renamed Stellantis — will become the world’s fourth-largest automotive group.
Stellantis will be based in the Netherlands, with large operations in France, Italy and the United States. The company will employ 400,000 people and include 14 automotive brands — from Fiat’s Maserati, Jeep and Ram to PSA’s Peugeot, Citroen and Opel. It would be the world’s fourth-largest automaker, after Toyota TM, Volkswagen VWAGY and the Renault-Nissan-Mitsubishi alliance, based on vehicle sales during the first nine months of 2020.
Carlos Tavares, the chief executive of PSA, will become the chief executive of Stellantis and Mike Manley, the chief executive of Fiat, will manage the combined company’s American operations. Common shares of Stellantis will begin trading on the Mercato Telematico Azionario in Milan and Euronext in Paris on Jan 18, followed by the New York Stock Exchange on Jan 19.
Rationale Behind the Mega Merger
Both companies had confirmed the merger plans in late 2019, and have been working out the details and acquiring regulatory approval since then.
However, the auto industry bore severe brunt of the coronavirus pandemic in the latter parts of the first and the second quarters of 2020. Both Fiat and PSA felt the heat of the pandemic with their auto sales plummeting largely. Reportedly, PSA’s vehicle sales were down 30% in the 11 months through November, while Fiat sold 30% fewer cars and trucks in the nine months through September.
Also, amid the heightening climate-change concerns, investors are intrigued by automakers providing green transportation solutions having zero carbon emissions. Amid this transforming scenario, automakers are fast changing gears to electric vehicles (EVs), kicking off an era of green transportation. Nonetheless, both Fiat and PSA have been relatively slower in the adoption of EVs in their vehicle line-ups.
Thus, the booming demand for EVs, along with the catastrophe caused by the pandemic made the merger even more appealing and viable. The companies became even more firm to team up in order to acquire economies of scale necessary to survive in an industry seized by technological advancement and hammered by the coronavirus mayhem.
The merger will enable the companies to share the cost of developing EVs, thus achieving cost efficiencies. Reportedly, the alliance is projected to provide about 5 billion euros, or $6.1 billion, in annual cost savings to the companies.
Moreover, the pandemic compelled the companies to modify the terms of the merger last September. A special dividend to Fiat’s shareholders, to be paid on closure of the merger, was slashed to 2.9 billion euros, or $3.6 billion, from €5.5 billion. In return, Fiat’s shareholders would get a bigger chunk of possible future payouts.
The merger with PSA is in sync with Fiat’s long-term strategy to tie up with companies in order to grow scale and consolidate costs. It is also the Italian-American automaker’s best chance of surviving in a brutally competitive auto sector by creating a new European champion.
PSA also stands to benefit largely from the merger. The combined company will boast an impressive presence in North America’s lucrative truck and SUV segments, giving the French automaker an access to the American market while reducing its dependence on Europe.
Nevertheless, the merged entity will face major challenges as well. Neither Fiat nor PSA have a strong foothold in China, the world’s largest car market, or in the growing EV market. In response to this, both companies are planning to pool resources plugged into product development, manufacturing and purchasing to free up money for betting big on EVs and self-driving systems with an aim to bolster sales and profitability.
Fiat currently flaunts a Zacks Rank of 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Shares of the company have appreciated 25.8% over the past year, while its industry has witnessed a rise of 19.2%.
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