Why Fiat Chrysler Is Merging With French Carmaker Peugeot

Rival carmakers PSA Group and Fiat Chrysler Automobiles unveiled a plan to combine, pooling resources to confront an expensive new era of trade tariffs, emissions rules and electrification.

Shareholders of each company will own 50% of the combined entity, to be listed in Paris, Milan and New York. Investors in Fiat will receive a dividend of 5.5 billion euros ($6.1 billion) and its robotics arm Comau, while France’s PSA plans to distribute its 46% stake in auto-parts maker Faurecia SE. Cost savings from the deal without plant closures are projected to be about 3.7 billion euros.

PSA shares dropped as much as 9.1% in Paris, the most in more than three years, while Fiat rose as much as 10% in Milan.

The boards of Fiat Chrysler and Peugeot and Citroen-maker PSA agreed to work toward a binding agreement in the coming weeks, they said Thursday in a joint statement. The accord would create the fourth-largest automaker with a combined market value of about $50 billion.

A merger of Fiat Chrysler and PSA, the No. 2 for car sales in Europe, would create a regional powerhouse to challenge Volkswagen AG. The tie-up would bring together the billionaire Agnelli clan in Italy and the Peugeot family of France as consolidation sweeps through an industry trying to finance major transformation.

The 11-member board of the new Netherlands-based group will have six members from PSA including Chief Executive Officer Carlos Tavares, who will remain CEO for five years, and five from Fiat Chrysler. Fiat Chairman John Elkann stays in that role. It’s unclear what role Fiat CEO Mike Manley will hold.

The announcement comes several months after Fiat Chrysler and PSA explored a partnership on pooling investment to build cars in Europe, and following the collapse in June of negotiations between Fiat and French competitor Renault SA.

“It’s not as good a partner as Renault, but any partnership is good,” said Felipe Munoz-Vieira, an analyst with Jato Dynamics in Turin. Fiat Chrysler “is not facing very good times, and it seems it’s getting worse as the time passes.”

Both PSA and Fiat Chrysler lag on investments in electrification and neither has a strong presence in China, but a combination could help them grow in the lucrative commercial vehicle market in Europe, Munoz said. Fiat Chrysler, which reports third-quarter earnings on Thursday, is suffering in Europe with an aging Jeep lineup and lack of SUVs under the Fiat brand, he said.

Automakers face tremendous pressure to combine to help pay for platform development, manufacturing and purchasing as they battle through trade wars, a global slowdown and an expensive shift toward electrification and autonomous driving. Producers face the additional burden in Europe of new rules on emissions.

Against this backdrop, the pace of dealmaking has picked up. Volkswagen in July said it will work with Ford Motor Co. on electric and self-driving car technology, while Toyota Motor Corp. is strengthening ties with partners such as Subaru Corp. and China’s BYD Co. The Indian conglomerate that owns Jaguar Land Rover has said it’s open to finding partners for the British automaker but isn’t planning on selling the embattled unit.

Dismal car sales have also added to the mix. Volkswagen on Wednesday lowered its outlook for vehicle deliveries this year due to a faster-than-expected decline in auto markets.

France is one of the biggest shareholders of PSA, whose brands also include Opel and Vauxhall, and the government has signaled support for a deal, while warning it would scrutinize the jobs impact and governance structure of the new company, as well as its commitment to build a European battery-maker.

“The operation responds to a need in the auto industry for consolidation to face the challenges of the future,” French Finance Minister Bruno Le Maire said in a statement Thursday.

PSA had been floated as a logical merger partner with Fiat, because of their complementary product and geographic fit, and the two sides discussed partnership possibilities this year. However, the Italian-American carmaker instead pursued a deal with Renault.

Those talks fell apart in June when Elkann, who also heads Fiat Chrysler’s largest shareholder, Exor NV, walked away amid opposition from the French government and a lack of support from Renault’s Japanese alliance partner Nissan Motor Co.

Tavares has sought to re-establish Peugeot’s foothold in the U.S., a market it exited in 1991. He set plans earlier this year for a return, with shipments starting from Europe or China in 2026.

Fiat has sought to secure its future with a larger partner for several years, dating back to late CEO Sergio Marchionne’s failed courtship of General Motors Co. After being rebuffed by GM in 2015, rumors of talks with other automakers have swirled with varying intensity.