Will Fiat make Peugeot Plan B if Opel bid fails?

Fiat CEO Sergio Marchionne pauses as he speaks to the media following a speech in Montreal, May 29, 2009.

MILAN (Reuters) - Italian automaker Fiat SpA could turn to France's PSA Peugeot Citroen as a potential merger partner if its bid for Germany's Opel fails, but a deal would be full of complications.

With rival bidder Magna International apparently moving into the lead, reaching a preliminary deal to buy the General Motors Corp unit on Friday afternoon, according to sources, some analysts see Peugeot as the Italian company's best back-up option.

Charismatic Fiat CEO Sergio Marchionne embarked on an ambitious plan to boost its scale and create a European automotive giant last month, agreeing to take a 20 percent stake in U.S. automaker Chrysler. The transfer of assets to Fiat is expected to take place as early as Friday.

Since May 20, when, fresh from the Chrysler deal, Fiat submitted its Opel bid its share price has fallen 4.2 percent, reflecting the risky nature of Marchionne's plan. The DJ Stoxx auto index has dropped 1.4 percent.

"Marchionne's expansion strategy is risky and Chrysler is the weakest part," said Metzler Equities' Juergen Pieper.

"The whole thing including Opel would have made some sense. If the Opel bid fails the whole thing is too weak and too risky."

Marchionne on Friday said its deal with Chrysler was its main focus, and ruled out teaming up with Magna. Even without Opel, life would "go on," he insisted.

Replacing the Opel jewel in Marchionne's European auto crown with Peugeot would create Europe's biggest car maker and boost Fiat well over the 5 million units of yearly output he has said he wants.

"You would probably get to run to about 7 million units. The scale argument would be even stronger in a Peugeot tie-up in whatever form versus a GM Europe (tie-up)," said Arndt Ellinghorst, an analyst with Credit Suisse.

"Peugeot has a similar problem, lack of scale in the market."

SMOKESCREEN?

Eric-Alain Michelis, analyst at SG Securities, said a Peugeot alliance made sense since it and Fiat had commercial ties through a 20-year-old cooperation accord for light vehicles.

A Fiat merger could broaden Peugeot's market internationally as well as joining forces in the high-end premium market with such brands as Fiat's Alfa Romeo and Lancia, he said.

"It makes sense. Some people are saying (Fiat's effort with) Opel is a type of smokescreen to attract media attention so they can negotiate behind the scenes with Peugeot," Michelis said.

But an alliance with Peugeot could bring its own problems.

Peugeot has already said it wants to remain on its own and if Fiat were to try for a deal with the French carmaker, analysts say it would face having to pay out money it does not have, in addition to family politics, possible protectionism in both France and Italy and union opposition to any cost cuts.

Nomura analyst Michael Tyndall said Fiat had limited options outside Opel, noting past speculation about talks between Fiat and Peugeot as well as with Germany's BMW and Daimler AG.

"I think we can safely assume that none of those talks were productive. So we're left scratching our heads. Where would they find the scale?" he asked.

TOO SMALL

Among other European automakers, GM Swedish unit Saab and Volvo are too small to make much impact on volumes, analysts said. However, Marchionne said on Friday Fiat was interested in seeking a deal with Saab if its Opel bid failed.

Fiat also has a joint venture with Tata Motors Ltd but the Indian company is too far away and its products too different to provide cost savings for Fiat.

With more than 100 car brands in China, a company there might be buyable, said Metzler's Pieper, noting any deal there would be small in comparison with Opel.

Nomura's Tyndall said neither Fiat nor Peugeot had the money to carry out a restructuring and the Italian and French governments would likely become involved in a merger.

"I don't think the French government, having loaned 3 billion euros to Peugeot, would be interested in providing money that would potentially see French jobs go," he said.

(Additional reporting by Nigel Tutt and by Helen Massy-Beresford in Paris; Editing by Jon Loades-Carter)