Long road ahead as Fiat Chrysler, Peugeot agree $50 billion merger

– Fiat Chrysler and Peugeot maker PSA have struck a binding deal to create the world’s fourth biggest carmaker, and now face the challenge of winning over regulators and delivering on a pledge to slash costs without closing factories.

Both tasks are likely to prove difficult, as two of the industry’s oldest dynasties try to combine Europe’s second and third biggest car manufacturers under the gaze of politicians and trade unions who have vowed to resist any move to cut jobs.

Success is vital to help both companies cope with a slowdown in autos demand and the cost of making cleaner vehicles to meet tougher emissions regulations.

In a sign of the pressures on the wider industry, Sweden’s Volvo AB (VOLVb.ST) agreed on Wednesday to sell its Japan-based UD Trucks business to Isuzu Motors (7202.T) for about $ 2.3 billion and share technology to help cut costs.

France’s PSA (PEUP.PA) and Italian-American Fiat Chrysler Automobiles (FCA) (FCHA.MI) announced a preliminary deal six weeks ago for an all-share merger that would create a company worth about $ 50 billion and unite brands such as Fiat, Jeep, Dodge, Ram and Maserati with the likes of Peugeot, Opel and DS.

The terms were little changed in the binding deal announced on Wednesday, including a target to cut costs by 3.7 billion euros ($ 4.1 billion) a year without closing factories.

However, analysts said the effective premium being paid by PSA to achieve the 50-50 split was slightly lower.

The companies sold a combined 8.7 million vehicles last year, but have potential manufacturing capacity of 14 million vehicles, according to forecasters LMC Automotive.

They have yet to say precisely how they plan to tackle that potential excess, and which car platforms – or underlying vehicle structures – they will focus on, only detailing that most production would be concentrated on two platforms.

NordLB analyst Frank Schwope said big challenges lay ahead.

“The merged group will have to make massive savings and probably also close plants, even if the CEOs’ choice of words is different,” he said, adding large investment would be needed as both PSA and FCA are “currently lagging far behind the competition in terms of technology and product range.”

The finance ministers of both France and Italy welcomed the deal, but also said they would closely monitor any impact on jobs in their respective countries.

The merged company will employ around 400,000 people worldwide, and unions have warned they will resist job losses.

FCA said it would meet unions on Friday to discuss the deal.

(GRAPHIC: Fiat Chrysler vs Peugeot in a snapshot – here)

SMOOTHING THE BUMPS

PSA and FCA said in a statement they expected the deal to close in the next 12 to 15 months, and that they would come up with a name over the coming months. In the meantime, they will have to win over regulators in the United States and Europe.

“This is obviously a huge consolidation of the sector that will surely require a considerable effort in securing competition (approval) across a variety of jurisdictions and especially the European Union,” said Jonathan Branton, head of competition at global legal business DWF.

In a move that could help smooth U.S. approval, one of PSA’s shareholders, China’s Dongfeng Motor Group (0489.HK), will trim its 12.2% stake in the French firm by selling 30.7 million shares to PSA.

That stake was worth 679 million euros ($ 748 million) at the most recent closing price, and Dongfeng will have 4.5% of the merged group.

“This is the way of supporting this merger and making sure we don’t have bumps on the road,” said PSA CEO Carlos Tavares, who will be chief executive of the combined group.

At 1145 GMT, PSA shares were up 1.3% at 22.40 euros. FCA’s were steady at 13.60 euros.

FAMILY AFFAIR

The merger brings together the Peugeot family, which built its first vehicle around 130 years ago and still holds a stake in PSA, and Fiat’s Agnelli clan, whose scion John Elkann will chair the combined group

There will be an 11-strong board, with five members nominated by PSA and five by FCA, including labor representatives from both.

Tavares, whose initial five-year term as CEO will begin once the deal has closed and gained all approvals, will have the additional seat on the board.

The companies did not clarify what would happen when Tavares leaves. Two sources close to PSA told Reuters last week that French stakeholders were seeking reassurances they would retain a numerical advantage on the board.

A shock lawsuit by General Motors (GM.N) filed last month against FCA in the United State over alleged union bribing did not affect the merger terms, FCA CEO Mike Manley told reporters, reiterating the claim was “meritless”.

Manley said he hoped FCA would “now dispose of that quickly” and if not, the company would defend itself vigorously.