STLA Stellantis NV

By Stephen Wilmot 

Investors seem reluctant to pin much hope on the merger of Fiat Chrysler and its French peer PSA. Yet its potential -- and financial terms favorable to the Italian-American company -- will become harder to ignore as the deal approaches the finishing line.

Few people doubt that the car industry needs mergers. That is particularly true in Europe, where the top three players had just 53% market share in the first half of the year and regulators are promoting low-margin electric vehicles. Even before the coronavirus struck, the industry consistently failed to make a reasonable return on its vast capital employed.

Fiat Chrysler and PSA, which owns the Peugeot Citroën, Opel and Vauxhall brands, expect to generate at least EUR3.7 billion ($4.38 billion) worth of cost savings through their merger. Taxed and capitalized, these "synergies" could have a net present value of roughly EUR15 billion, potentially adding more than 70% to the companies' combined equity value (excluding payouts due to shareholders before completion). But there isn't a trace of this potential in their share prices, which have fallen with -- and in PSA's case more than -- the wider sector since The Wall Street Journal first reported the talks last October.

Investors' caution in attributing value to the deal is understandable. They have been burned before, most notoriously when Mercedes-Benz maker Daimler bought Chrysler in 1998. Volkswagen has never translated its scale into superior returns. Closing car factories tends to be extremely political. These are all good reasons why investors prefer to see the fruits of a deal before bidding stock prices up.

Yet this time really is different. The combined company, due to be called "Stellantis," will be run by PSA's Carlos Tavares as chief executive and Fiat Chrysler's John Elkann as chairman. The men share an intense focus on capital allocation. Mr. Tavares has achieved wonders at PSA, not least by buying the former European business of General Motors and integrating its models onto PSA platforms. Adding the underperforming European business of Fiat Chrysler seems like a comparable job.

Scale has particular advantages as the industry grapples with mounting technology costs. Last month PSA announced plans for a dedicated electric-vehicle production platform. This investment was likely easier to justify in view of the coming merger.

To be sure, Stellantis isn't a fast-moving story. The deal is expected to close in the first quarter of 2021. Meanwhile, European antitrust authorities are scrutinizing the companies' van divisions, which would enjoy a more dominant market position than their cars. There is a modest risk that the regulators weaken the economics of the deal. Even if they don't, the companies expect to take four years to achieve roughly 80% of the cost savings.

Yet there is also a short-term argument for buying into the Fiat Chrysler side of the deal. The company's equity currently trades roughly 5% below the value implied by the merger terms. This discount is much narrower than it was in early April, when deal spreads were wild across the board, but wider than it was before the pandemic. The crisis has raised some doubts about the terms: Can the company really afford to pay out a EUR5.5 billion cash dividend before completion, as negotiated? But second-quarter results were much better than expected, suggesting it probably can.

Fiat Chrysler shares have something to attract patient and impatient investors alike.

Write to Stephen Wilmot at stephen.wilmot@wsj.com

(END) Dow Jones Newswires

August 17, 2020 09:39 ET (13:39 GMT)

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