STLA Stellantis NV

By Eric Sylvers and Ben Dummett 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (March 23, 2019).

MILAN -- Peugeot maker PSA Group approached Fiat Chrysler Automobiles NV earlier this year about combining the two car makers, according to people familiar with the matter, proposing to form a $45 billion industry behemoth that would reposition their businesses in the U.S. and Europe.

Fiat Chrysler rebuffed the overture, as it had previous ones by the French car maker, according to these people. Those approaches haven't been previously disclosed.

Fiat Chrysler has said for years that it is open to a big deal with another auto maker if it fits the company's objectives. Executives have balked, though, at a tie-up with Peugeot because it would increase the Italian-American auto maker's already large exposure to Europe's mature market, according to people familiar with the matter.

The company's controlling family, the Agnellis of Italy, is also opposed to a combination with Peugeot that could mean accepting a large proportion of PSA, according to one of these people. Peugeot, which has telegraphed its interest in finding a partner, would likely need to fund any deal in large part with stock in order to keep its debt in check, according to this person. The French auto maker is still digesting its 2017 acquisition of Opel, General Motors Co.'s European business.

Auto-industry consolidation is a perennial theme, with a multitude of brands fighting furiously for customers, especially in mature markets. Auto makers are also under intense pressure to innovate with electric vehicles and self-driving technology, forcing collaboration between traditional rivals to share the investment load.

Sergio Marchionne, Fiat Chrysler's longtime CEO who died suddenly last year, was himself a high-profile proponent of deal-making, making no secret of his desire to merge his company with GM, only to be spurned.

Executives at Peugeot and Fiat Chrysler are no longer talking, according to people familiar with the matter. Discussions could resume, though neither side has indicated that as imminent, the people said.

Fiat Chrysler declined to comment.

A Peugeot spokesman declined to comment specifically on any approach to Fiat Chrysler. He said the two companies have a joint venture to make commercial vehicles, so executives are talking all the time about collaborations.

A spokesman for the Agnelli family's holding company declined to comment.

Peugeot Chief Executive Carlos Tavares is eager to expand in the U.S., where the French brand has been absent for almost three decades. He has outlined plans to eventually reintroduce the nameplate in the U.S., but a tie-up with Fiat Chrysler would bring with it wide access to the American market. Fiat Chrysler dealers selling the popular Jeep and Ram brands could potentially offer Peugeot models as well.

A deal would give Fiat Chrysler more exposure to Europe, where Peugeot sold 2.5 million vehicles last year compared with one million for Fiat Chrysler; but the Italian-American company has tried in recent years to lessen its dependence on the continent. A combined Peugeot-Fiat Chrysler would sell almost as many vehicles in Europe as Volkswagen AG, the market leader with a 24% market share.

A combination would also lift Peugeot and Fiat Chrysler in the auto industry's global league table, offering it scale and potential cost-cutting opportunities. The two companies together sold 8.7 million cars last year, which would have ranked their combination at No. 4, just ahead of General Motors' 8.4 million vehicles sold.

A combined Peugeot-Fiat Chrysler would still be some distance behind the world's top three sellers. Volkswagen sold 10.8 million vehicles last year, roughly the same as the alliance between Renault SA, Nissan Motor Co. and Mitsubishi Motors Co. No. 3 Toyota Motor Corp. tallied 10.6 million vehicles.

Richard Hilgert, an auto analyst at Morningstar Inc., said a Peugeot-Fiat Chrysler tie-up would make sense in creating a formidable competitor to Volkswagen in Europe and gaining scale globally. "Where it is lopsided is PSA would get Jeep and Ram, and there isn't anything comparable on the PSA side that would benefit Fiat Chrysler," he said

The pursuit of a merger follows Mr. Tavares's so-far successful turnaround of Opel, which was acquired from GM for more than EUR2 billion ($2.26 billion). Opel lost more than $20 billion in the previous two decades under GM ownership; in 2018, it reported a 4.7% operating margin, marking its first profitable year since 1999.

Mr. Tavares helped steer Peugeot itself out of trouble. In 2014, the French state and China's Dongfeng Motor Group Co. each took big stakes in France's second-largest car company behind Renault, injecting capital in Peugeot as it struggled with steep losses and a then-stagnant European market.

The recent vintage of the turnaround at Peugeot and its purchase of Opel could limit the company's financial flexibility. The market values of Fiat Chrysler and Peugeot are roughly the same, at about EUR20 billion ($22.65 billion) each. That would make a mostly cash deal difficult for Peugeot.

There could be regulatory hurdles as well, with Peugeot's Chinese and French ownership stakes drawing attention in the U.S. The Committee on Foreign Investment in the U.S. has looked closely at Chinese-related deal making involving American companies and technology. The Trump administration has focused on U.S. manufacturing including the auto industry -- though Dongfeng's relatively modest 12% stake in Peugeot may not cause much alarm.

Peugeot's attempt to merge with Fiat Chrysler comes as the auto industry faces billions of dollars of investments in coming years to develop electric vehicles, autonomous-driving technology and less-polluting engines. The industry is increasingly competing -- and partnering -- with technology companies to commercialize driverless cars and explore ride-sharing opportunities like those offered by Uber Technologies Inc.

That scramble is coming with a big price tag. Volkswagen said last week it would cut as many as 7,000 jobs over five years as it tries to slash costs and make room for new investment in these new avenues. GM and Ford Motor Co. have disclosed big job losses amid their own restructurings.

Auto makers themselves are teaming up on projects to innovate. In the same vein, a full-flung merger would allow Peugeot and Fiat Chrysler to spread the costs of any new investment push over a larger production base. Fiat Chrysler in recent years has concentrated on paying down its debt and has lagged behind competitors in investments.

Both auto makers have talked openly about finding a dance partner.

Mr. Marchionne's successor at Fiat Chrysler, Mike Manley, recently endorsed deal making.

This week, Robert Peugeot, a member of the French family that owns a large stake in the car maker, told French newspaper Les Echos that he is open to the idea of a deal with another auto maker, including Fiat Chrysler.

"With them, as with others, the planets could be aligned," he said.

Mr. Tavares also has chimed in. "We love to discuss with people who are open for deals," Peugeot's CEO said at this month's Geneva motor show.

--William Boston contributed to this article.

Write to Eric Sylvers at eric.sylvers@wsj.com and Ben Dummett at ben.dummett@wsj.com

(END) Dow Jones Newswires

March 23, 2019 02:47 ET (06:47 GMT)

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