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Fiat Chrysler (FCAU) & PSA Groupe Sign 50-50 Merger Agreement

Zacks Equity Research

Fiat Chrysler Automobiles N.V. FCAU and France’s PSA Groupe recently signed a binding agreement for their merger in a 50-50 share swap. The tie-up between Italian-American automaker Fiat-Chrysler and PSA will result in the creation of the fourth largest global automotive OEM by volume and the third largest by revenues, with combined revenues of nearly€170 billion.

Fiat Chrysler is aimed at distributing a special dividend of €5.5 billion to its shareholders. PSA is set to issue 46% stake in Faurecia to its shareholders. At closing, PSA shareholders are anticipated to obtain 1.742 shares of the new company for each share of PSA Groupe, while Fiat Chrysler shareholders will get 1 share of the new combined company for each share of Fiat Chrysler.

Shares of the new entity will be listed in New York, Paris and Milan. The combined company will be headed by Fiat Chrysler’s John Elkann as the chairman and PSA’s Carlos Taveres as the CEO.

The combined entity will create an industry behemoth with annual sales of 8.7-million vehicles, only behind Volkswagen VWAGY, Toyota Motor TM and Renault-Nissan Alliance, each of which sell more than 10 million units. It is also expected to generate recurring operating profit of more than €11 billion and an operating profit margin of 6.6%.

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In the rapidly-evolving auto industry, this deal will help pool the strengths of both carmakers to invest efficiently in new technologies, foster innovation and compete globally. The pact will bring about annual run-rate synergies of around $3.7 billion. Around 80% of the synergies are expected to be achieved after four years. The total one-time cost of achieving the synergies stands at €2.8 billion.

Apart from financial and operational synergies, the deal will help the company solidify their positions in different markets. While Fiat Chrysler will aid PSA to achieve a long-sought presence in North America, the latter will help the former to strengthen its foothold in Europe. The new entity will have much greater geographic balance with 46% of revenues derived from Europe and 43% from North America.

While Fiat Chrysler is performing well in the North American market, sluggish operations in the European market are a cause of concern. Considering its troubles in Europe, the company’s decision to merge with PSA — Europe’s second largest car manufacturer in terms of sales — seems prudent. Further, Fiat Chrysler — which lacks low-emissions technologies — is likely to benefit from PSA’s expertise.PSA is on track to introduce seven EVs by 2021 and offer either electric or hybrid versions of all models by 2025. For PSA, the chief motive is to benefit from a dealership network to sell vehicles in the United States.

Zacks Rank & Stocks to Consider

Fiat Chrysler currently carries a Zacks Rank #3 (Hold).

Investors can consider a better-ranked player in the same industry, Weichai Power Co. WEICY, sporting a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.

Weichai Power has a projected earnings growth rate of 6.11% for the current year. Its shares have surged 83.2% over the past year.

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Toyota Motor Corporation (TM) : Free Stock Analysis Report
 
Fiat Chrysler Automobiles N.V. (FCAU) : Free Stock Analysis Report
 
Weichai Power Co. (WEICY) : Free Stock Analysis Report
 
Volkswagen AG (VWAGY) : Free Stock Analysis Report
 
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