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Fiat Chrysler-Renault deal offers technology, scale benefits for both companies

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Fiat Chrysler-Renault deal offers technology, scale benefits for both companies

The proposed merger of equals between Fiat Chrysler Automobiles NV and French automaker Renault SA makes strategic sense. It would offer FCA an opportunity to narrow the technological gap with its rivals and provide Renault with the scale it has sought but so far failed to achieve with its alliance partner Nissan Motor Co. Ltd., analysts said.

Investors have responded warmly to the 50/50, all-share deal. Shares in both companies rose 15% following the May 27 announcement, giving them a combined market cap of €34.24 billion.

Analysts believe that the deal could help fill gaps in both companies' respective product ranges and geographic reach.

"FCA needs to access the latest technologies and that is the main reason why we like the deal. Without this, we believe FCA was behind its peers and the future would be very gloomy for the group," Monica Bosio, head of equity research at Intesa SanPaolo IMI, said in an interview.

"It makes sense. ... Renault will increase its presence and FCA can better balance its revenue breakdown," Bosio said.

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FCA's revenue from its biggest market, North America, where its focus is Jeep off-road vehicles and SUVs, is more than triple its total sales for Europe, Middle East and Africa. The Fiat brand has a long history in the European passenger car segment but has pared back its mainstream range in recent years. It now only produces the 500 model, budget Panda compact and small to medium-size Tipo hatchback, while its first electrified offering is about a year away. Its long-established, high-volume Punto hatchback was not replaced when production ceased in 2018.

FCA, also the parent of the Alfa Romeo and Lancia brands, has been hoping to pay electric-car producer Tesla Inc. to statistically pool their fleets before the European Union as a means of offsetting excess CO2 emissions ahead of tighter pollution rules from 2020. The company could otherwise face fines of about €2 billion, according to press reports.

Renault ranks as one of the earliest movers in the electric vehicle segment. Its Zoe hatchback and small electric Kangoo van has been on sale since early in the decade. However, it is likely to welcome the greater scale offered by the Italian company's courtship after efforts to turn its cost-saving alliance with Nissan into a more formal tie-up following the imprisonment of former Chairman and CEO Carlos Ghosn were reportedly rebuffed.

Such alliances have become increasingly common throughout the industry, with automakers under pressure to simultaneously invest in developing EV technology, digital connectivity and autonomous vehicles.

"I think initially, strategically, the merger probably makes sense," said Matthias Hellstern, managing director in the corporate finance group at Moody's. "You have Renault, which is strong in Europe, and FCA, which is strong in the U.S. You are also combining two entities which probably couldn't afford to develop new technologies on their own, so there will be synergies in R&D."

Renault has had no presence in the United States since a brief foray in the 1980s when it owned a controlling stake in American Motors Corp. Any overlap resulting from the merger would be between Fiat and Renault passenger cars in Europe, where they have always been fierce competitors.

The combined companies would still be smaller than Volkswagen AG. The merger would be unlikely to attract attention from competition regulators, including in Brazil and Argentina where the two brands' market share totals about 25%, analysts said.

Both companies have undergone a change of leadership in the last year with the unexpected death of FCA CEO Sergio Marchionne and the sudden departure of Carlos Ghosn from the highest ranks of both Nissan and Renault, two of the most familiar faces in the global automotive industry.

FCA has suffered from surplus manufacturing capacity at its Italian plants. That is something a foreign-controlled company may find easier to scale back than one headquartered in Turin within easier reach of the national government.

"There is a lot of influence coming from the governments. They are making it hard to rationalize capacity," Hellstern said, adding that he did not expect the latest announcement would necessarily trigger similar moves among other automakers.

"There is pressure to combine forces in the industry, but I don't think this is the one everyone has been waiting for to start doing business," Hellstern said.

Intesa SanPaolo IMI's Bosio cautioned that any merger was likely to take about a year to reach a meaningful stage with costs to be dealt with before any synergies would kick in.

Forging a single company from a collection of disparate brands with strong heritages and customer loyalties in different countries would require that the integration process be sensitively handled, Christoph Stürmer, global lead analyst at PwC Autofacts, said in an interview.

"Mergers of equals have proven not to work in the auto industry unless it is clear from the outset which corporate culture will be the new role model. It is almost always that of the buying companies," Stürmer said.