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Peugeot, Fiat Chrysler agree automotive megamerger

French carmaker Peugeot SA and its Italian-American peer Fiat Chrysler Automobiles NV on Dec. 18 agreed to a 50/50 merger to create the fourth-largest global automaker by volume and the third-largest by revenue.

The combined company will have annual unit sales of 8.7 million vehicles, revenue of nearly €170 billion, recurring operating profit of more than €11 billion and an operating profit margin of 6.6%, based on 2018 results, the companies said in a joint statement.

At closing, Peugeot, or Groupe PSA, shareholders will receive 1.742 shares of the new combined company for each share they hold, while FCA shareholders will receive 1 share of the new combined company per FCA share.

The carmakers, which have a combined market cap of €41.10 billion, said the merged entity will be "strongly placed" for significant investments in developing new energy vehicles, sustainable mobility, autonomous driving and connectivity, while meeting the challenging global CO2 regulatory requirements.

The combined group's Dutch-domiciled parent company will be listed on the Euronext Paris, the Borsa Italiana in Milan and the New York Stock Exchange.

The deal will close in 12-15 months, subject to shareholder approvals and the satisfaction of antitrust and other regulatory requirements. The combined company is expected to have an investment-grade credit rating.

FCA's largest shareholder, Exor NV, and PSA's largest shareholders, Bpifrance SA, the Peugeot family-controlled entities EPF and FFP, and China's Dongfeng Motor Group Co. Ltd., have each irrevocably committed to vote in favor of the transaction at the shareholders meetings.

John Elkann, FCA chairman and owner of Exor, will be chairman of the combined entity, while Group PSA Chairman Carlos Tavares will be CEO for an initial term of five years.

"Our merger is a huge opportunity to take a stronger position in the auto industry as we seek to master the transition to a world of clean, safe and sustainable mobility and to provide our customers with world-class products, technology and services," said Tavares.

Terms of transaction

Before closing, FCA will distribute to its shareholders a special dividend of €5.5 billion while Groupe PSA will distribute to its shareholders its 46% stake in parts maker Faurecia SE. FCA will also separate its holding in its industrial automation subsidiary Comau.

Exor, Bpifrance, Dongfeng Motors and the Peugeot family's EPF/FFP entities will enter into a seven-year standstill agreement following completion of the merger. However, EPF/FFP will be permitted to increase its holding by 2.5% and Bpifrance and Dongfeng may reduce their stakes by 2.5%.

Dongfeng has agreed to sell 30.7 million shares to PSA prior to closing and will own 4.5% of the new group.

Under the proposed by-laws of the combined company, no shareholder would have the power to exercise more than 30% of the votes cast at shareholders' meetings. The combined company will not carry over existing double voting rights. New double voting rights will accrue after a three-year holding period after completion of the merger.

Each company intends to distribute a €1.1 billion ordinary dividend in 2020 related to fiscal year 2019, subject to approval by each company's boards and shareholders.

The board will consist of 11 members, of which six will be independent directors. FCA and Elkann will nominate five directors, while Groupe PSA and its major shareholders will nominate five directors, including the senior nonexecutive director and the vice chairman. Tavares will be the 11th director. Both companies will nominate a director representing FCA and Groupe PSA employees.

Synergies

The merger will combine FCA's strength in the Americas, especially the U.S. SUV and pickup categories, with PSA's presence in Europe. The companies said the combined entity will be in a better position to reshape the strategy in other regions, hinting at a new plan for the Chinese market.

The companies said no plant closures are expected as a result of the transaction. The merger will deliver nearly €3.7 billion of estimated annual run-rate synergies, and synergies are expected to be net cash flow positive from the first year, with nearly 80% of the synergies achieved by the fourth year. The total one-time cost of achieving the synergies is estimated at €2.8 billion.

The companies said vehicle platforms, engine families and new technologies will account for approximately 40% of the annual run-rate synergies. Another 40% is expected from improved purchasing performance due to an increased scale. Other areas, including marketing, IT, G&A and logistics, will account for the remaining 20%.

"More than two-thirds of run-rate volumes will be concentrated on two platforms, with approximately 3 million cars per year on each of the small platform and the compact/mid-size platform," the companies said.

Messier Maris & Associés acted as lead financial adviser to PSA. Morgan Stanley also provided financial advice to the company and Bredin Prat served as legal counsel.

Goldman Sachs was lead financial adviser to FCA, with Bank of America, Barclays, Citigroup, d’Angelin & Co., J.P. Morgan and UBS also advising. Sullivan & Cromwell LLP, De Brauw Blackstone Westbroek and Darrois Villey Maillot Brochier provided legal advice.