PSA-FCA merger: will parity survive the pandemic?

The general meetings of shareholders of the two partners expected to complete their merger of equals in the coming months must have reassured observers and certain minority shareholders: the project is well on track and the initial terms of the agreement have no reasons to be reconsidered.

However, according to the Italian press, Société Générale would have issued a report, which would have consulted the Rai, which would explain all the reluctance of the bank towards the two manufacturers. According to said report “it’s time to review the terms of the merger between PSA and FCA” because neither of the two entities would weigh the financial weight initially announced: the merger “must be equal” while the market capitalization of the two is far from identical. It would therefore be appropriate, according to the French bank, to use article 7 of the agreement, which says that it can be modified “in case of different material conditions”.

In the same way, the press largely relayed the past week issues raised by Phitrust, minority shareholder.
An investment company press release, summarizes its position expressed at the General Shareholders’ Meeting last week in the following terms:
“The respective situation of the two groups which seemed to us already in December 2019, does not justify a 50/50 merger, taking into account the planned divestments and distributions, of the respective situation of the two groups in industrial (and social …) terms, of their level of preparation for the next environmental standards and of the changes imposed on the automobile sector, appears today to be very different, and in any case even more distant from that which had been presented when the merger was announced. “

The shareholder therefore asked that the amounts of the envisaged distributions be reviewed, that the consequences which should be drawn in the event of failure be considered and that the social consequences of the reduction in capacity, site closings and reductions be specified. workforce by geographic area and overall for the new PSA-FCA group.

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It is partly to respond to these objections and to pass the resolutions that allow it to continue its negotiations that Carlos Tavares vigorously reaffirmed at the general meeting organized on Thursday 25 June his faith in the project by claiming that the synergies resulting from the merger between the PSA group and Fiat-Chrysler (FCA) would probably be greater than expected: the 3.7 billion euros of annual synergies announced during the presentation of the merger plan could thus, he claims, be only an amount “floor”.

He adds that the balance of the agreement “has been worked on for a long time”, that it is “fairly fine, fairly relevant” and tries to close the discussion opened by Phitrust by stating: “The time has not come in the midst of post-Covid reconstruction to raise this issue.” It does not however seem to exclude that this balance could be revised when it concludes: “If there are other events, they will be decided by the boards” of the two companies.

In fact, Phitrust has every reason to underline the obvious: the parity of the two future mergers was already highly doubtful at the end of 2019; 2020 shows that the fundamentals of Italian-Americans are more fragile than those of French.

PSA has lowered its break even enough to remain profitable despite the vertiginous fall in sales. This allows the company to avoid resorting to the loan guaranteed by the state and gives it a free hand to possibly distribute to the shareholders the amounts envisaged to rebalance.

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FCA on the contrary announced in May a net loss 1.7 billion euros in the first quarter and a decline in turnover of 16% to 20.6 billion euros. The operating margin rate, which was 6.2% last year, is now only 0.3% in the first quarter and the quarter that ends is expected to be worse.

It is under these conditions that Fiat has just resorted, for its Italian operations, to the state guarantee for 80% of the loan of 6.3 billion euros that the bank Intesa Sanpaolo granted it. In return, the government demanded that the group commit to investing 5.2 billion in Italy, on current projects or to build new ones.

As RFI points out, this requirement expresses a certain distrust of the government which “Wants to ensure that this aid is used to finance activity in Italy, and not in the Netherlands or the United States, where the headquarters and part of the manufacturer’s activities are located. Fiat Chrysler directly employs 55,000 people on the peninsula. None of these positions can be eliminated in the next three years. ”

Between these constraints, of which PSA is not ballasted – which does not suffer from the overcapacity problems which Fiat must face – and the huge investment needs in the ranges of its different brands and technologies, what we knew from the outset will become more and more evident over the months: FCA needs PSA more than PSA from FCA.

As long as the capitalizations adjust and the exceptional dividends envisaged become impossible to distribute, the boards will indeed have to take the risk of going to clash by re-examining the agreement.

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