Fiat CEO Proposed Tieup With Opel, Peugeot

Unnamed sources said that Fiat CEO Sergio Marchionne envisions a merger between Fiat, General Motors German unit Opel, and French automaker Peugeot–Citroen, according to a Newsweek report.

“The European car market is a disaster. It has plunged off a precipice that doesn’t seem to have bottomed out yet. The prospects are anything but rosy,” Marchionne told Reuters in September.

According to Newsweek sources, in early October he approached GM and Peugeot executives with the plan to merge the three companies. All three are struggling with their European operations and need to cut costs and increase innovation.

The private, and so far unconfirmed proposal would see Fiat, which also owns Chrysler, merge with French automaker Peugeot–Citroen and GM’s German unit Opel. While shareholders of Peugeot would receive shares in the new entity, GM would have to pay up for getting rid of Opel. “The CEO also offered to take Opel as part of the deal if he got $5 billion to $7 billion to restructure the unit,” said the Newsweek report.
During a conference call on Oct. 30, discussing Fiat’s Q3 results, Marchionne denied that he had spoken to GM about Opel. “Don’t read anything into having a coffee at the bar. There are other things than combinations and mergers that people talk about from time to time.”

Fiat, OPEL and Peugeot All Loss Making

Despite the denials, stakes are high for all three companies involved and the merger could present a solution to their problems.

If one reads the presentation of Fiat’s Q3 results, one could get the impression that times haven’t been better. The company posted a net profit of $370 million and liquidity of $25.9 billion versus a net-debt of $8.7 billion.

The problem, however, is that the profits come exclusively from its Chrysler division, whose sales are not generated in Europe. If one excludes Chrysler from the results—to get a better view of the European operations—the picture is altogether different—$362 million in net losses, more than last year, and liquidity of only $12.7 billion.

“At end H1 (first half of the year), Fiat was sitting on a large amount of gross liquidity but during the course of Q3, the non-Chrysler business burnt through $1.8 billion in [cash],” writes Barclays in a research report.
According to German weekly Manager Magazin, Fiat operates at only 50 percent of capacity in Europe.

Shipments to Europe, the Middle East, and Africa dropped from 239,000 in Q3 2011 to 203,000 in Q3 2012 and it is probably no coincidence that the region features last in the company’s Q3 slide pack.

Peugeot–Citroen is not doing much better. It lost $1.06 billion in the first half of 2012 and sales have dropped 13 percent during the first nine months of 2012, according to Manager Magazin.

In a bid to save up to $1.94 billion per year until 2015, Peugeot is laying off 10,000 people, and even closing a factory near Paris. To make things worse, the company had to accept $9.1 billion in guarantees for its financing subsidiary from the French government. Consequently, a government representative will be installed on the company’s supervisory board, which traditionally narrows management’s ability to drive through cost-saving plans.

General Motors German arm Opel is also struggling. GM purchased the German company as far back as 1931, but the recent 10 years resulted in cumulative losses of $18.1 billion, according to Manager Magazin.

Opel is planning to reduce staff and might even close a major plant in Bochum, Germany. There has been no confirmation of this plan, but Opel announced on Oct. 30 that it would form a working group named “Bochum Perspective 2022.”

It will consist of Opel and GM managers as well as representatives from the state of North–Rhine Westphalia. In the meantime, negotiations with the German metal Union IG–Metall are ongoing. Despite poor results, Steve Girsky, the GM representative on the board of Opel, remains cooperative, “We are happy to contribute our share to this important endeavor, and this includes financial resources,” he said in a press release.

Opel and Peugeot have already started to cooperate on purchasing and announced last week that they would develop at least four joint models together. Both companies are aiming to save $2.6 billion per year within the next five years with their cooperation.

Three-Way Merger Increases Scale to Save Costs

Opel and Peugeot are already working together and Fiat just needs to squeeze in to complete the three-way merger.

According to Barclays, the Fiat CEO is looking for scale to reduce costs as he announced a new plan for capital expenditure at the results conference Oct. 30. This action was independent of the possible merger with Peugeot and Opel, but hints in the direction Fiat wants to go.

Barclays analysts say that ultimately, however, he will have to reduce capacity. “Fiat desperately needs to take out capacity in Europe … and yet today’s new industrial plan removed any possibility of plant closure and instead focuses on pushing upscale and exporting out of Europe in order to improve utilization.”

The three companies combined would have a share of 25 percent of the European market, more than Volkswagen’s 24.8 percent. “In conversations with Peugeot, Marchionne has argued that the parties can create a Europe-focused company without any interference from American managers, one of the [sources] said,” according to the Newsweek report.

According to the same sources, however, Peugeot sees little benefit in partnering up with Fiat. A partnership would increase the exposure to weak markets such as Spain and Italy. The involvement of the French government in Peugeot’s business further complicates the matter.

Peugeot would much rather exploit GM’s global presence than deepen European integration with Fiat, according to Newsweek. Opel’s press release hints at further collaboration. “Peugeot and GM will investigate other possible ways of integration,” read the last sentence of the document.