By Nick Kostov
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (May 30, 2019).
PARIS -- Fiat Chrysler Automobiles NV's proposal to merge with
Renault SA is under scrutiny in France, where the government,
unions and some executives at the French auto maker are questioning
whether the plan undervalues Renault and puts jobs at risk.
Fiat Chrysler wants to merge with Renault and create the world's
third-largest auto maker by production, with a market value of
about $40 billion. To complete the deal, both companies would need
to convince the French state and other key stakeholders in Renault
that a merger doesn't threaten its status as a symbol of national
industry.
Those concerns loom large as Renault's board prepares to vote
early next week on whether to enter exclusive talks with Fiat
Chrysler. The French state, which is Renault's largest shareholder,
and labor unions command six out of the 17 votes on the auto
maker's board.
French Finance Minister Bruno Le Maire, while viewing the talks
as worth pursuing, has reeled off a list of demands, including
French representation on the merged company's board and heavy
investment in the development of electric batteries in Europe. The
government also wants the combined company to fit within the
framework of Renault's alliance with Nissan Motor Co. and
Mitsubishi Motors Corp.
On Wednesday, Renault Chairman Jean-Dominique Senard and its
chief executive, Thierry Bolloré, discussed Fiat Chrysler's
proposal with the CEOs of Nissan and Mitsubishi at a previously
scheduled meeting in Yokohama, Japan.
Nissan's Hiroto Saikawa said he listened to Mr. Senard's
explanation of the proposal, but he didn't state whether or not he
favors it.
"That will come later," Mr. Saikawa said. "Of course we have to
look closely at what specific advantages there would be for
Nissan's business and what problems would have to be overcome."
In any combination that involves Fiat Chrysler and Nissan, the
Italian-American auto maker is expected to pitch capital savings in
the U.S. market to its Japanese counterpart, a person close to the
deal said.
Executives at Renault and Fiat Chrysler had been secretly
exploring ways to share costs for several months, according to
people familiar with the matter. But with the merger proposal made
public Monday, the clock is ticking. People involved in the
negotiations said both sides aim to reach an agreement before
Renault's annual general meeting on June 12.
"Right now we have momentum," one French official said. "The
more you take your time, the more you find difficulties or reasons
not to do a deal in negotiations like these."
Mr. Le Maire on Tuesday described Fiat Chrysler's overture as "a
good opportunity for Renault and a good opportunity for the
European automobile industry," given the heavy investment required
to navigate the auto market's shift toward electric vehicles and
autonomous driving.
Early critics of the proposal are digging in. A key point of
contention is how Fiat Chrysler envisions wringing EUR5 billion, or
nearly $5.6 billion, in annual cost savings from the merger without
shutting down factories. Plant closures are highly charged
politically in Europe, which is the only region where the
companies' operations overlap significantly. Fiat Chrysler makes
most of its profit and sales in the U.S., where Renault doesn't
sell cars.
Fiat Chrysler's pledge to keep plants open doesn't necessarily
safeguard jobs because many factories could be run at a reduced
capacity, said Bruno Aziere, a representative of a moderate labor
union that wields a vote on Renault's board.
The leftist CGT union, which holds one seat on Renault's board,
says the only way the French state can guarantee jobs at the merged
company is to maintain a "blocking minority" by not allowing its
15% stake in Renault to be diluted in any deal. Fiat Chrysler's
proposal calls for the French government's stake in the combined
group to fall to about 7.5%, with Paris losing its special voting
powers.
A person close to the negotiations said labor savings aren't a
motivating factor because synergies are expected from the pooling
of purchasing across the brands and the standardization of
windshields, wheels and other car parts. Fiat Chrysler is not
proposing a merger of "two troubled companies that need to
restructure," the person said.
"There's stuff they can do, but if they can get half of the EUR5
billion they'll be heroes for me," Max Warburton, an analyst at
Bernstein Research, said.
Current and former Renault executives question how Fiat
Chrysler's proposal values Renault. It calls for ownership of the
combined business to be evenly split between the two auto makers'
shareholders. The Italian-American car maker said its shareholders
would also receive a dividend of EUR2.5 billion to offset the
disparity between the market value of the two companies.
Patrick Pélata, a former Renault chief operating officer,
criticized the proposal for valuing Renault shares as of May 24, a
day after they closed at a six-year low. Fiat Chrysler had a market
value of close to $20 billion, compared with roughly $17 billion
for Renault. That market price gives Renault's operations a
negative value of EUR6 billion, excluding the market value of
Renault's 43.4% stake in Nissan, its 1.5% stake in Daimler AG and
its auto-finance operations, Mr. Pélata said in an interview.
"It's not reasonable," he said.
One senior Renault executive said "no one will accept this
price."
A person close to Fiat Chrysler played up the company's
lucrative business of selling sport-utility vehicles and pickups in
the U.S. and elsewhere. "If you're an FCA investor, you're
contributing the jewel brands of Jeep and Ram, and in return you're
essentially getting a European business," he said.
A memo circulated this week among top managers at French auto
maker Peugeot described Fiat Chrysler's proposal as a "virtual
takeover of Renault by Fiat," according to a person familiar with
the document. Peugeot held workshops with Fiat Chrysler in recent
months to discuss synergies that could flow from a tie-up,
according to people familiar with the matter.
A Peugeot spokesman said the company's strategy division
regularly conducts analysis for top management using publicly
available information.
The person close to Fiat Chrysler said that even with the
special dividend proposed for the company's shareholders, the deal
entails a 10% premium for Renault.
Some Renault executives also warn about the cost of keeping
Fiat's fleet in line with emissions standards. The Italian-American
auto maker, which relies on traditional gasoline-powered vehicles,
recently struck a deal with Tesla Inc. to count the electric-car
company's vehicles as part of its own fleet in order to comply with
EU rules. Analysts at Jefferies say Fiat Chrysler could have faced
billions of euros in fines when new regulations become law in
2020.
"It's a broad industry problem. FCA is in a worse position than
others but it's not totally out on a limb," Mr. Warburton said.
The person close to the car maker said it is committed to
complying with emission standards, and has pledged to invest EUR9
billion in electric vehicles as part of its current five-year
plan.
--Sean McLain in Tokyo contributed to this article.
Write to Nick Kostov at Nick.Kostov@wsj.com
(END) Dow Jones Newswires
May 30, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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