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Billionaire Agnellis Make Another Bet on France

Chris Bryant

(Bloomberg Opinion) -- The automotive M&A carousel is taking another turn, with Peugeot SA and Fiat Chrysler Automobiles NV hopping aboard this time. The two companies confirmed on Wednesday that they are in talks about a potential merger that would create a $47 billion auto giant. 

This comes just a few months after Fiat abandoned talks to merge with Peugeot’s French rival Renault SA. And yet the news isn’t the least bit surprising: Peugeot and Fiat have both made clear in the past that they’re keen on consolidation, and indeed they’ve discussed working together before.

Providing the two partners are willing to take tough decisions and politics doesn’t get in the way (again), the stars might just align this time. If anyone can make a go of a hugely complex trans-Atlantic auto merger, Peugeot’s self-assured CEO Carlos Tavares is surely that person.

The main reason these two companies are talking is that they’re both sub-scale compared with industry giants Volkswagen AG and Toyota Motor Corp. That matters when the industry is spending heaps on things like electrification and autonomous driving. Neither company is a leader in these technologies, but sharing the financial burden would certainly help. It’s also helpful that their respective stock market valuations aren’t that far apart. This makes an all-share merger of equals conceivable and avoids one party having to shell out for a big premium.

Renault long seemed the more logical partner for Fiat because roughly 80% of Peugeot’s sales are in Europe, where Fiat struggles to make money and has tried to diversify away from. 

However, Renault has drifted since the arrest of former boss Carlos Ghosn, its cash flow has deteriorated and its alliance with Nissan Motor is in need of repair. In short, it’s not a tremendously appealing partner right now.

In contrast, Peugeot is in good health. Tavares has shown his mettle by rapidly turning around the Opel/Vauxhall business that Peugeot acquired from General Motors. And even Germany’s luxury carmakers are struggling to match the almost 9% operating profit margins that Peugeot is achieving, despite a pretty tepid European car market.

While Fiat’s balance sheet isn’t as strong as Peugeot’s, there’s still plenty there to tempt Tavares. In Jeep and Ram, Fiat has a very profitable SUV and trucks business, and that U.S. footprint would be helpful if Peugeot decides to re-enter the U.S. market. 

So what could go wrong? Plenty. Fiat and Renault’s merger talks fell apart because the French state, a Renault shareholder, couldn’t get comfortable. And unfortunately for Tavares, France also owns a 12% stake in Peugeot.

In theory France should welcome consolidation that strengthens a key domestic manufacturer. But the greatest financial benefits of a merger would come from rationalizing their respective manufacturing footprints — and that means cutting jobs.

Still, Fiat Chairman John Elkann, head of the billionaire Agnelli clan, has doubtless learned a few lessons from his earlier entanglements with French politics. Once bitten, twice wiser? One way or the other, we’re about to find out.  

(Updates with confirmation of the talks.)

To contact the author of this story: Chris Bryant at cbryant32@bloomberg.net

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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