FCA-Renault merger plan confirmed

Fiat Chrysler Automobiles (FCA) and Groupe Renault have announced they are in discussions about a 50/50 merger that would create the world’s biggest automotive group.

Confirming recent reports that a merger between the Italian-American and French car-makers was imminent, FCA today outlined its proposal for a combined business to be co-owned by FCA and Renault group shareholders, with a “balanced governance structure” and a majority of independent board directors.

FCA said a merger with Renault would create the world’s third largest car-maker with 8.7 million annual vehicle sales – allowing it to leapfrog Hyundai Motor Group and General Motors, but not Volkswagen Group and Toyota Motor Corporation, which both topped 10 million vehicles last year.

The existing Renault-Nissan-Mitsubishi Alliance produced more than 10.6 million vehicles in 2017, making it the world’s biggest automotive alliance. Combined with those Japanese brands, a merged FCA-Renault company could produce more than 15 million vehicles annually across 18 brands.

Eclipsing the 10 brands owned by the VW Group, that number includes premium marques Maserati, Alfa Romeo, Infiniti and Alpine, and mainstream brands Renault, Nissan, Mitsubishi, Jeep, Fiat, Chrysler, RAM, Dodge, Abarth, Dacia, Samsung Motors, Datsun, Venucia and Lada.

However, FCA’s proposed merger with Renault -- which holds a 43.4 per cent controlling stake in Nissan, which in turns holds a 34 per cent controlling stake in Mitsubishi – does not include Nissan, which has been in partnership with Renault since 1999, or Mitsubishi, which came under Nissan control in 2016.

Nissan, which holds a 15 per cent non-voting stake in Renault, has resisted merger proposals by the French company and the relationship between the two car-makers has soured following the arrest of former Renault-Nissan Alliance chairman Carlos Ghosn in Tokyo on charges of financial crimes.

If successful, the merger – which reportedly follows a takeover bid for FCA by PSA Peugeot-Citroen -- would realise the dream of former FCA boss, the late Sergio Marchionne, who was a strong supporter of mergers in order to reduce cost via production scale.

Marchionne, who died in July last year from complications following shoulder surgery, tried but failed to team up with both GM and VW in a bid to save billions of dollars in back-office expenses and R&D in costly electric and autonomous vehicle technologies by scaling up production.

Describing its proposal as a “transformative merger”, FCA said the deal would create the world’s third-biggest auto-maker with “full market coverage, from luxury to mainstream”, a “broad and complementary brand portfolio”, a strong presence across all key regions, more than €5 billion in annual savings and “€1 billion of additional estimated run rate synergies”.

FCA’s non-binding deal, which was finalised in weekend talks with Renault, said no plant closures were planned under an arrangement that would merge the two car-makers under a listed Dutch holding company that, as of Friday, would have a combined market value of €32.6 billion.

“The FCA proposal follows initial operational discussions between the two companies to identify products and geographies where they could collaborate, particularly as they develop and commercialize new technologies. These discussions made clear that broader collaboration through a combination would substantially improve capital efficiency and the speed of product development,” said FCA.

“The case for combination is also strengthened by the need to take bold decisions to capture at scale the opportunities created by the transformation of the auto industry in areas like connectivity, electrification and autonomous driving.

“The proposed combination would create a global automaker, preeminent in terms of revenue, volumes, profitability and technology, benefitting the companies’ respective shareholders and stakeholders.

“The combined business would sell approximately 8.7 million vehicles annually, would be a world leader in EV technologies, premium brands, SUVs, pickup trucks and light commercial vehicles and would have a broader and more balanced global presence than either company on a standalone basis.”

FCA expects 90 per cent of synergies to come from purchasing savings (40%), R&D efficiencies (30%) and manufacturing and tooling efficiencies (20%), including “the potential to reduce the combined number of vehicle platforms by approximately 20% and engine families by approximately 30%”.

“The full run rate of estimated synergies is expected to be achieved by the end of year six following closing, with about 80% achieved in year four. Taking into account the impact of the approximately €3-4 billion in cumulative implementation costs, it is estimated that the synergies would be net cash flow neutral in year one and positive from year two onward.

“Geographically, based on FCA and Groupe Renault’s 2018 global sales, the combined company would be #4 in North America, #2 in EMEA [Europe, Middle East, Africa] and #1 in Latin America and would have the increased resources necessary to grow its footprint in the APAC region [including Australia].

“On a simple aggregated basis of 2018 results, the combined company’s annual revenues would be nearly €170 billion with operating profit of more than €10 billion and net profit of more than €8 billion.

“The FCA and Groupe Renault combination together with its Nissan and Mitsubishi partners would be the largest global OEM alliance, selling more than 15 million vehicles annually. The additional synergies stemming from the merger of FCA and Groupe Renault that are expected to accrue to Nissan and Mitsubishi purely as members of the Alliance are estimated to be worth an incremental €1 billion annually.

“This proposal offers the opportunity to create the #3 global automotive company with broad, complementary and strong brand and geographic presence and important strengths in transforming technologies. It also confirms and enhances the value of the existing Alliance and its potential to become even stronger in the future.”

For its part, Renault today said in a statement: “Renault’s Board of Directors met today to examine the proposal received from FCA (Fiat Chrysler Automobiles) regarding a potential 50/50 merger between Renault S.A. and FCA.

“After careful review of the terms of FCA’s friendly proposal, the Board of Directors decided to study with interest the opportunity of such a business combination, comforting Groupe Renault’s manufacturing footprint and creating additional value for the Alliance.

“A further communication will be issued in due course to inform the market of the results of these discussions, in accordance with applicable laws and regulations.”