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Combined Fiat Chrysler/Peugeot would be larger but leaner, say analysts

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Combined Fiat Chrysler/Peugeot would be larger but leaner, say analysts

A merger between U.S.-Italian automaker Fiat Chrysler Automobiles NV and French counterpart Peugeot SA could achieve significant cost savings, analysts said, welcoming the proposed transaction despite some inevitable product overlap in European passenger cars.

The companies, which together would become the third-biggest automaker in the world by revenue after Volkswagen AG and Toyota Motor Corp., confirmed Oct. 30 that they are in talks about a tie-up after previous short-lived discussions in March.

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One of the key attractions of the deal is the companies' respective geographic focuses. Fiat Chrysler generated 68.3% of its 2018 sales in North America as its SUV brands dwarf its European mass-market passenger car sales, while Peugeot made 78.4% of its revenue in Europe, according to data compiled by S&P Global Market Intelligence.

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Peugeot would benefit from joining forces with a company that is largely outside the European Union's increasingly stringent regulatory cocoon and by gaining greater exposure to off-road-style brands growing fast in a North American market still comparatively free of such pressures. Fiat Chrysler would in turn benefit by plugging into Peugeot's technological advances, particularly in electrification, as it tries to make up for lost time in that field.

"This would create all kinds of opportunities to share costs on advanced technologies and scale economies," said David Leggett, automotive analyst at consultancy GlobalData, who noted the potential for platform sharing, a now-widespread cost-cutting practice in the industry.

"There is a clear industrial rationale, and the question is to what extent there is overlap and opportunity to address capacity," Leggett said, referring to the small and midsize cars that both Fiat and Peugeot market in Europe, and the likelihood that a combined company would need to trim its European production facilities to boost efficiency.

Investors reacted favorably to news of the talks with Fiat Chrysler's Milan-traded shares closing 9.5% higher at €12.87, and Peugeot's stock up 4.5% in Paris to €26.05.

Analysts had also been warm to the idea of Fiat Chrysler joining forces with Renault when those companies announced merger talks in May, underscoring a growing emphasis on boosting scale and efficiency as a means of survival in an industry whose business model is being radically disrupted.

The short-lived courtship with Renault ended in June, with the heavy influence of the French government cited as a major factor, and there was a sense of mourning at the loss of opportunity from the companies themselves and industry observers.

The similarities between Peugeot and Renault extend beyond their focus on the European passenger car market and lack of presence in the U.S. They also both count the French state among their largest shareholders (the joint-largest in Peugeot's case, via the Bpifrance sovereign wealth fund.) S&P Global Ratings in a note said that although the deal would be credit positive for both companies, there could be political resistance to cost-cutting measures.

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Peugeot CEO Carlos Tavares, who press reports suggest would head the combined company, has also become a rising star in the industry, shaking up efficiency and profitability at the French brands and overseeing a rapid recovery at Opel/Vauxhall since acquiring the ailing brands from General Motors Co. in 2017. Prior experience as executive vice president at Nissan Motor Co. Ltd. also gives him familiarity with the U.S. market.

Lacking a U.S. presence, the Peugeot, Citroen, DS and Dacia brands do not compete with Fiat Chrysler's SUV-focused Jeep, Dodge and Ram makes, the latter of which is one of the U.S. market's fastest-growing brands. But the competition that has always existed between the mass-market Fiat, Peugeot and Citroen brands would inevitably lead to some sales cannibalization, analysts said.

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"In our view this is not a match made in heaven," Julie Boote, analyst at Pelham Smithers, said in a note, pointing out that there were several downsides despite the promise of scale at a combined 8 million cars and industrial synergies.

Boote said Peugeot lags in artificial intelligence, autonomous driving and connectivity, suggesting the technological benefit to Fiat may be limited to the electrification of powertrains. Peugeot is preparing to launch fully electric versions of its fast-selling Opel Corsa and Peugeot 208 models.

At the same time, Boote noted that the Fiat brand's U.S. presence, focused around its retro-styled 500 model and larger 500 X, has fallen by two-thirds over five years to 15,000 cars, and she was unexcited by Peugeot's prospects in the U.S. market if the brand does resurface there, as Tavares has suggested. Boote also highlighted that both companies are suffering from the downturn in the Chinese market.

However, Fiat could offer significant value through its luxury Maserati and premium Alfa Romeo brands, where it focused its energies in recent years to capture value in that "sweet spot in the market," according to Gabriele Gambarova, analyst at Banca Akros.

"I think they will keep alive the most iconic products like the 500 and 500 X. They have found a solution for their operations in premium, luxury and electric. I wouldn't go back to a full [Fiat] line-up," Gambarova said.