Proposed FCA, Renault merger will create world's third largest OEM

Fiat Chrysler Automobiles has delivered a non-binding letter to the Renault Group Board proposing a combination of their respective businesses as a 50/50 merger. The FCA proposal follows initial operational discussions between the two companies to identify products and geographies where they could collaborate, particularly as they develop and commercialize new technologies.

Acknowledging receipt of FCA's proposal, Renault’s Board of Directors says: “After careful review of the terms of FCA’s friendly proposal, the Board of Directors decided to study with interest the opportunity of such a business combination, comforting Groupe Renault’s manufacturing footprint and creating additional value for the Alliance. A further communication will be issued in due course to inform the market of the results of these discussions, in accordance with applicable laws and regulations."

According to FCA, broader collaboration between the two OEMs would substantially improve capital efficiency and the speed of product development, more so in a technologically disruptive era to take bold decisions to capture at scale the opportunities created by the transformation of the auto industry in areas like connectivity, electrification and autonomous driving.

The proposed combination would create a global automaker, preeminent in terms of revenue, volumes, profitability and technology, benefitting the companies’ respective shareholders and stakeholders. The combined business would sell approximately 8.7 million vehicles annually, would be a world leader in EV technologies, premium brands, SUVs, pickup trucks and light commercial vehicles and would have a broader and more balanced global presence than either company on a standalone basis.

The benefits of the proposed transaction are not predicated on plant closures, but would be achieved through more capital efficient investment in common global vehicle platforms, architectures, powertrains and technologies.

Under the terms of the proposal, shareholders in each company would receive an equivalent equity stake in the combined company. The combination would be carried out as a merger transaction under a Dutch parent company. The Board of the combined entity would initially be composed of 11 members, with the majority being independent and with equal representation of four members each for both FCA and Groupe Renault, as well as one nominee from Nissan. Further, there would be no carryover of existing double voting rights. However, all shareholders would have the opportunity to earn loyalty voting rights from the completion of the transaction under a loyalty voting program. The parent company would be listed on the Borsa Italiana (Milan), Euronext (Paris) and the New York Stock Exchange.

The benefits flowing from the combination of the two businesses would be shared, 50 percent by current FCA shareholders and 50 percent by current Renault Group shareholders.

Leveraging complementary strengths
Combining the businesses will bring together complementary strengths. The combination would create a brand portfolio with a presence in all key segments from luxury/premium brands, such as Maserati and Alfa Romeo, to the strong access brands of Dacia and Lada, and would include the well-known Fiat, Renault, Jeep and Ram brands as well as commercial vehicles. The Renault Group has a strong presence across Europe, Russia, Africa and Middle East, while FCA is uniquely positioned in the high margin segments in North America and is a market leader in Latin America.

FCA’s evolving capability in autonomous driving, which includes partnerships with Waymo, BMW and Aptiv, is complemented by Groupe Renault’s decade of experience in EV technology where it is the highest selling EV OEM in Europe. Groupe Renault also has a well-established and profitable financing business (RCI Banque).

The combination would be highly value accretive for both FCA and Groupe Renault shareholders, delivering in excess of 5 billion euros (Rs 38,908 crore) of estimated annual run rate synergies, incremental to existing Alliance synergies. These synergies would arise principally from the convergence of platforms, the consolidation of powertrain and electrification investment and the benefits of scale. FCA estimates based on its experience, that approximately 90 percent of synergies would come from purchasing savings (~40%), R&D efficiencies (~30%), and manufacturing and tooling efficiencies (~20%). Included in these estimated savings would be the potential to reduce the combined number of vehicle platforms by approximately 20 percent and engine families by approximately 30%. The full run rate of estimated synergies is expected to be achieved by the end of year six following closing, with about 80 percent achieved in year four. Taking into account the impact of the approximately 3-4 billion euros (Rs 23,345 crore to Rs 31,216 crore) in cumulative implementation costs, it is estimated that the synergies would be net cash flow neutral in year one and positive from year two onward.

Geographically, based on FCA and Groupe Renault’s 2018 global sales, the combined company would be #4 in North America, #2 in EMEA and #1 in Latin America and would have the increased resources necessary to grow its footprint in the APAC region. On a simple aggregated basis of 2018 results, the combined company’s annual revenues would be nearly 170 billion euro (Rs 1,323,110 crore)  with operating profit of more than 10 billion euro (Rs 77,830 crore) and net profit of more than 8 billion euro (Rs 62,264 crore).

While the proposal focuses on a combination of FCA and Groupe Renault, FCA looks forward – as part of a combined enterprise with Groupe Renault – to working with Groupe Renault’s Alliance partner companies on ways to create additional value for all Alliance members. FCA recognizes the standing and achievements of Groupe Renault’s partners and sees significant expected benefits to all parties from the expanded partnership. The FCA and Groupe Renault combination together with its Nissan and Mitsubishi partners would be the largest global OEM alliance, selling more than 15 million vehicles annually. The additional synergies stemming from the merger of FCA and Groupe Renault that are expected to accrue to Nissan and Mitsubishi purely as members of the Alliance are estimated to be worth an incremental 1 billion euro annually (Rs 7,783 crore).

This proposal offers the opportunity to create the #3 global automotive company with broad, complementary and strong brand and geographic presence and important strengths in transforming technologies. It also confirms and enhances the value of the existing Alliance and its potential to become even stronger in the future.

Interestingly, the FCA proposal mentions there will be no plant closures but more efficient capital investment. FCA, represented by Fiat and Jeep in India, has a plant at Ranjangaon in Maharashtra, while Renault and Nissan produce cars at a facility in Oragadam, Tamil Nadu. FCA has seen a change in fortunes in India, thanks to the success of the Jeep Compass, but Renault has been struggling of late, with sales on a downturn. FCA’s documents list that ‘the proposed merger would give the entity increased resources to grow its footprint in the Asia Pacific region’.

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