Posted Dec 16 2019 at 6:45 am
PSA and Fiat Chrysler are on track to meet the schedule they had set. After making it public their union project October 31, the two manufacturers are expected to announce this week that they have agreed to the signing of an engaging agreement (a “memorandum of understanding” in the terminology of Anglo-Saxon business). According to Reuters, a supervisory board is to be held Tuesday at PSA, information that boosted the group’s share price by 2% on Friday.
This agreement will mark a decisive step. No less than a hundred collaborators from the two groups, not counting outside counsel, have worked diligently there since the beginning of November. The document must indeed specify in great detail the terms of the wedding of the year. With sometimes decisive clarifications to bring on several key subjects.
· Long-term governance
This is undoubtedly the most awaited point. PSA and Fiat Chrysler announced end of October “A 50-50 merger”, with “balanced” governance, each camp having the power to appoint 5 of the 10 members of the board of directors of the future entity. But PSA will have an advantage: its boss Carlos Tavares is slated to be the CEO of the new group for a minimum of five years, and will sit as such as the eleventh member of the board of directors.
The question is what will happen in five years, when Carlos Tavares is no longer in charge. Will the board revert to 10 members, or will PSA somehow retain pre-eminence? In view of the financial terms of the project, the second hypothesis holds the rope, estimates a former leader of the sector: “The calculation of valuations is very favorable to the shareholders of Fiat Chrysler, and could correspond to a consideration in terms of governance going beyond five years ”. The binding agreement must confirm this.
· The gradual exit from Dongfeng
The Chinese manufacturer is one of the three current reference shareholders of PSA, alongside the Peugeot family and bpifrance (12.23% of the capital each, which will fall to 6.1% of the new group). If specific clauses provide that none of them can sell their shares for three years after the closing of the merger, an exception will be made for the Peugeot family, which will be able to buy 2.5% of the new set from one of the other two.
What kill two birds with one stone: if this 2.5% is bought from Dongfeng, the Chinese group will fall to 3.6% of the new group. Either below the 5% mark allowing him to claim an administrator. What should satisfy the American authorities who will have their say, given the weight of Chrysler in the United States: too large a Chinese shareholder is likely to be a problem for the Trump administration.
Such a transaction would also satisfy another objective – crucial in the eyes of the Peugeot family: to balance French interests in the new group with those of the Agnelli family, which today hold 29% of FCA through their holding company Exor. In total, the Peugeot and bpifrance would then own 14.7% of the new group, against 14.5% for the Agnelli. QED.
· The potential troubles of Fiat Chrysler
At Fiat Chrysler, the preparation of the draft agreement was hampered by two cases with potentially devastating financial consequences. On November 20, its competitor from Detroit General Motors filed a complaint accusing him of having paid bribes to union leaders for years in order to obtain more favorable wage costs. And about ten days ago, the press revealed that the Italian tax authorities reproach Fiat to have reduced the value of its activities in the United States upon completion of the Chrysler takeover in 2014.
The recovery calculated by the transalpine tax authorities could reach 1.3 billion euros. As for the damages claimed by GM, they could climb, according to a study by JP Morgan Chase, up to 13.5 billion! In both cases, the Italian-American group disputes these allegations. But if the facts were proven, the bill would permanently weaken Fiat Chrysler. Some analysts have also estimated that Carlos Tavares had the opportunity to revise the plan for the benefit of PSA.
“In general, in such cases, the parities do not move. We should no longer expect a reduction in the exceptional dividend of 5.5 billion euros paid to the shareholders of Fiat Chrysler, ”said Gaëtan Toulemonde, at Deutsche Bank. The draft agreement should also take care to protect the interests of PSA shareholders, which will be all the more complicated as the two procedures could take years to complete.
To note
Due to the numerous regulatory authorizations to be obtained, the completion of the transaction should not occur before one year.