HONG KONG (Reuters Breakingviews) - What happens when a French bureaucrat, a Chinese government official, rich European heiresses and a captain of car-making walk into a boardroom? This start of a bad financial joke is what could result from the proposed $50 billion merger of Fiat Chrysler Automobiles, and Peugeot. Crunching together two second-tier businesses is tough enough without a muddled governance structure.
A better way forward would be to ensure that Exor, the Agnelli family holding that is Fiat’s biggest shareholder, retains a position of dominance. That would give the combined company’s professional cost-cutting aficionado, Peugeot boss Carlos Tavares, the whip hand in making the difficult decisions needed to squeeze out $6 billion of annual savings potentially on offer.
The idea presents a challenge, however. Although Fiat’s market value is about $1 billion larger than Peugeot’s, the French automaker has three shareholders of equal standing: France’s sovereign wealth fund, Beijing-backed Dongfeng Motor and the scattered progeny of Peugeot’s founders. Each holds 12.2%. Exor owns 29% of Fiat. In a merger at current prices, the Peugeot trio would wind up with about 18% of the company, and Exor around 15%. That is unlikely to fly with the Agnellis.
Tilting the exchange offer toward Fiat would be too much to ask of Peugeot’s owners, given the implied change of control. Therefore, tactically deploying some cash may be in order. Peugeot could do what Fiat proposed in its aborted merger with Renault earlier this year: pay out a slug in a so-called “equalising dividend” to shareholders before the merger. If it distributed 5 billion euros ($5.6 billion) of the almost 8 billion euros of cash on hand at the end of June, the trio’s combined equity stake in the new company would, in theory, drop below Exor’s.
Would the Chinese and the French bite? Both came to Peugeot’s rescue five years ago, investing some 800 million euros each for equity worth 2.7 billion euros today. Dongfeng was looking to sell its stake, Bloomberg reported in August. And despite some dirigiste propensities, French President Emmanuel Macron needs to shore up his country’s finances and start an innovation fund. A Fiat-Renault deal might have more to offer on paper but aligned interests would make Fiat-Peugeot a smoother ride.
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