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Pandemic Hits FCA-PSA Merger Terms

The terms of engagement are shifting as car sales swoon
#europe #Fiat #FiatChryslerAutomobiles

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The urge to merge between Fiat Chrysler Automobiles and PSA group was cruising right along earlier this year. The coronavirus has created major potholes.

The 50:50 deal looked like a sure thing when it was confirmed in late October and outlined in surprising detail a day later.

Speed Dating

Analysts gushed over the union, which would create the world’s fourth-largest carmaker. The merger would result in a company with a market value of $47 billion, annual revenue around $187 billion and an operating profit greater than $12 billion.

FCA Chairman John Elkann told reporters in late November that the companies expected to complete a memorandum of understanding by the end of December. The formal agreement to merge came 26 days later.

Talks about the details were humming smoothly through January. Then the coronavirus began rewriting the playbook.

Deal Reset

Today those assumptions from four months ago about annual revenue and profits look absurdly optimistic. But the entire industry is in the same boat. Will a global sales slump and likely recession derail the FCA-PSA merger itself?

Probably not. But it certainly has complicated the terms.

For one thing, the two companies had agreed in December to each pay their respective shareholders a $1.2 billion dividend based on 2019 results, Bloomberg News points out. But since then, their stock prices and combined market cap have plunged by 40%, and the revenue outlook has turned grim.

New Math

Both companies saw their unit sales in Europe drop 40% in the first quarter, according to trade group ACEA. Last month sales in the region plunged by two-thirds for PSA and three-quarters for FCA as stay-home orders dried up demand.

Now with markets in disarray, carmakers could be pushed to consider government-backed bailout loans. During the financial meltdown in 2008, PSA received a $3.3 billion loan backed by the French government with the proviso that it protects jobs.

This time around, PSA told analysts, it wants to avoid such aid to keep itself “as free as possible of public dependence” for the sake of the merger. It may have no choice. France and Italy—the home countries for PSA and FCA—won’t consider applications from companies that pay a dividend.

Full Steam Ahead?

Neither company has commented publicly about the pace of ironing out the merger details or how the financial terms may be shifting.

PSA CEO Carlo Tavares said in an internal memo two weeks ago that the companies’ merger teams were speeding up their work, Reuters reports. Sources tell the news service the merge could be finalized early next year.

Certainly, the participants are eager. Whether the economic climate they find themselves in will cooperate is far from clear.

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