Fiat Chrysler and Peugeot sign deal for 50-50 merger

The boards of Fiat Chrysler Automobiles and PSA Peugeot on Wednesday signed a binding merger creating the world’s fourth-largest automaker with the scale to confront the challenges of stricter emissions regulations and the transition to new driving technologies.

The companies said in a joint statement the new group will be led by PSA’s cost-cutting CEO Carlos Tavares, with Fiat Chrysler’s chairman John Elkann as head of the board of the merged group. Fiat Chrysler CEO Mike Manley will stay on, though it was unclear in what capacity.

No name for the new company has been decided, executives said, but both Tavares and Manley insisted it was not a “touchy subject.”

The merger is expected to yield 3.7 billion euros in savings a year, which will be invested in “the new era of sustainable mobility” and to meet strict new emissions regulations, particularly in Europe.

“‘The merged entity will maneuver with speed and efficiency in an automotive industry undergoing rapid and fundamental changes,” the companies said in their statement.

The new technologies include electrified engines, autonomous driving and connectivity, part of what Tavares described as ‘’the transition to a world of clean, safe and sustainable mobility.” Both companies have lagged in developing electric cars in particular.

The deal, which was first unveiled in October, was billed as a 50-50 merger, but PSA has one extra seat on the board and Tavares at the helm, giving the French carmaker the upper hand in daily management.

The executives said they expect the deal to take 12-15 months to close. It will create a company with revenues of nearly 170 billion euros (nearly $190 billion) and producing 8.7 million cars a year—just behind Volkswagen, the Renault-Nissan alliance and Toyota.

No plants will be closed under the deal, the companies said. Savings will be achieved by sharing investments in vehicle platforms, engines and technology, while leveraging scale on purchasing.

But the executives also said there would be cuts. Decisions on where those will come will be made after the deal closes.

“There is room for sharing (a) significant amount of existing platforms and avoiding excess investments for the future,” Tavares said.

Fiat Chrysler shares rose nearly 1% in Milan, while Peugeot gained almost 2% in Paris trading.

Both the Peugeot and Fiat brands are strong on small car technology, with significant overlap in Europe. Manley said that the convergence of platforms would be “an early target” that will likely take two years to achieve.

Nick Oliver, a management professor at the University of Edinburgh Business School, said that most of the savings are likely to come from cost cuts as ‘’it is not clear how the merger will boost joint revenues.”

‘’Neither partner has products that can easily be sold under the others’ brands in new or existing markets. Both are weak in China, the world’s largest car market, while their center of gravity is in the mature European market,” Oliver said.

Meanwhile, the deal will give Peugeot the opportunity to try to sell more in the U.S., where it does not have much of a presence. With 2,640 dealers across the U.S., Fiat Chrysler would be a ready distribution network.

PSA specializes in small and medium-sized cars, which have fallen out of favor with U.S. and even some international buyers who prefer SUVs and trucks. PSA could build its own vehicles off the underpinnings of Fiat Chrysler’s hot selling Jeep SUVs and Ram trucks.

The new company will be legally based in the Netherlands, and traded in Paris, Milan and New York.

The executives played down the significance of the new entity’s name and headquarters location, but both are symbolic choices that will signal who is in the driver’s seat.

The French and Italian governments as well as unions will be looking for such details, given the national significance of car-making to both economies. The French government helped rescue PSA Peugeot in 2014 and owns a 12% stake through the state investment bank.

While the merger of Fiat and Chrysler has been a success, thriving on the strength of the U.S. market and the executive prowess of longtime CEO Sergio Marchionne, the history of car mergers is littered with failed tie-ups. Most famous among those is the short-lived Daimler-Chrysler merger, which foundered on cultural differences between the German and U.S. executives.

The new company will start with a strong base in Europe, where PSA is the second-largest carmaker, while Fiat makes most of its profits in North America and has a strong presence in Latin America. It will be looking to strengthen its position in China, where both companies lag.

“That is part of the opportunities,” Tavares said. ‘’We are not happy with our performance there. We think we should be doing better in China.”

Tavares said the deal has the support of Chinese partner and investor Dongfeng. As part of the deal, Dongfeng’s stake in the new company will be diluted from 6.2% to 4.5%.

Fiat Chrysler will pay its shareholders a 5.5 billion-euro ($6.1 billion) premium, raising questions about whether the new company will be saddled with debt. Analysts estimate that Peugeot is paying a hefty 32% premium to take control of Fiat Chrysler.

Fiat Chrysler has long been looking for an industrial partner in recent years, and a previous deal with French rival Renault last spring fell apart over French government concerns about the role of Renault’s Japanese partner, Nissan.

Tavares said both the French government and unions backed the new deal from the beginning.

French Finance Minister Bruno Le Maire said in a statement the deal was “very good news for France, for Europe and for our auto industry.” He said the government would keep an eye on where the company decides to set up its executive headquarters, the impact on French jobs and PSA’s commitment to creating a European battery industry.

Italy’s economy and finance minister, Roberto Gualtieri, likewise welcomed the deal, saying it ‘’was a fundamental step in the consolidation of the car industry.”