Fiat Chrysler (FCA) and Peugeot owner PSA are in talks over a potential tie-up that could create a $50bn giant better placed to tackle a host of costly technological and regulatory challenges facing the global car industry.
The two groups said in separate statements on Wednesday they were holding discussions aimed at creating one of the world’s leading car makers, after a source familiar with the matter said on Tuesday that talks were taking place.
After abandoning a proposed merger with Renault in June, FCA Chairman John Elkann confirmed the group’s bid to pursue an alternative alliance as car makers face huge investments for electrification, emission reduction and autonomous driving technologies.
Milan-listed shares in FCA opened up more than 10 percent on Wednesday, after ending up more than 7.5 percent on Tuesday in New York. Peugeot share rose more than six percent to hit their highest in more than 11 years.
Yet if a combination of Peugeot and FCA succeeds in overcoming political, financial and governance hurdles, the new enterprise would still face substantial challenges.
Global car makers face the prospect of a slowdown in demand coinciding with the most dramatic technology changes in a century.
Richard Hilgert, a senior equity analyst at Morningstar, a global financial services company, said in a note that total volumes of FCA and Peugeot, including China joint venture partners, amounted to 8.7 million vehicles last year, ranking the eventual combined group fourth behind Volkswagen, Toyota and the Renault/Nissan Alliance, each at more than 10 million units.
“We view the combination of these two companies as reasonable given global competition, high capital intensity, and industry disruption from electrified powertrain as well as autonomous technologies,” Hilgert said.
Investors have speculated for several years that FCA – itself the product of an Italian-US merger – was hunting for a further partner, encouraged by the rhetoric of the company’s late chief executive Sergio Marchionne.
FCA, controlled by Exor, the holding company of Italy’s Agnelli family, had discussed a combination with Peugeot earlier this year, before it proposed a $35bn merger with Renault.
At that time, FCA said a deal with Renault offered more advantages than a combination with Peugeot, but Elkann, a scion of the Agnelli family, broke off talks after French government officials intervened and pushed for Renault first to resolve tensions with its Japanese partner Nissan.
The French government has a 12-percent stake in PSA through state bank BPI, while the Peugeot family and the Chinese government each have a similar holding.
Max Warburton, an analyst at Bernstein, a money management company, said the combination of FCA and Peugeot had more logic and a greater chance of success than the previously attempted FCA-Renault deal but said PSA offered little synergies in the US, Latin America and China. “The focus will be Europe,” he said.
PSA’s supervisory board is due to meet on Wednesday to discuss the potential deal, two sources close to the matter said. FCA said in its statement it had nothing more to add for the time being.