October 31, 2019 / 11:06 AM / 7 months ago

Breakingviews - Cox: Sergio Marchionne posthumously gets his deal

HONG KONG (Reuters Breakingviews) - It’s a shame Sergio Marchionne isn’t around to see the deal unveiled by Fiat Chrysler Automobiles and French rival Peugeot. The merger, to create a carmaker worth more than $50 billion, is the apotheosis of an industrial vision that Marchionne advocated for years, but never got to see play out. After more than a decade running Fiat, Marchionne passed away in the summer of 2018.

Fiat Chrysler Automobiles CEO Sergio Marchionne smiles during the North American International Auto Show in Detroit, Michigan, U.S., January 9, 2017.

The transaction announced Thursday by John Elkann, the billionaire Fiat chairman and Agnelli family scion, ticks nearly every box in the checklist outlined by Marchionne in his now-famous “Confessions of a capital junkie” treatise. In that 2015 presentation, which he dubbed a cure for the “industry’s value-destroying addiction to capital”, Marchionne presciently argued for car-business consolidation to reduce capacity and share the burden of future investments.

What is most remarkable about the “confessions”, especially given the new mega-merger, is the absence of any mention by Marchionne of electric vehicles or batteries. It contains a single reference to autonomous driving. Yet the research and development cost and capital expenditure required to compete in this transportation arms race only makes the argument for cost-sharing manoeuvres even more relevant today than it was a few years ago.

True, there are elements of the Fiat-Peugeot transaction that Marchionne might have done differently. For instance, Exor, the Agnelli family investment company, will have the largest stake in the combination, but it will still have to contend with three other large shareholders – the Peugeot family, China’s Dongfeng Motor and the French state – whose interests may not always align with those of the Agnellis. Or with each other. A standstill agreement among the parties, however, looks designed to mitigate the governance risk.

And Exor is being paid handsomely in the process. Before the two companies are united under a Dutch holding, Fiat will distribute shares of its Comau industrial automation business and disburse 5.5 billion euros of cash in a special dividend. Given Exor’s 29% stake, that amounts to a 1.6 billion euro cash windfall, reducing the family’s financial exposure to cars, while still giving it the lead voice in an expanded automotive empire. 

In the end, the deal may be better than some of the alternatives that, through fits and starts and various dalliances even when Marchionne was alive, Fiat Chrysler could have envisioned. The near-marriage earlier this year with Renault is a case in point. Financially, the annual cost-savings from that union were greater than the 3.7 billion euros that Fiat-Peugeot is promising. But taxed and capitalised, what’s on offer now is worth at least 20 billion euros to investors today. That’s nearly equivalent to an entire Peugeot, feasted on by all shareholders.

Industrially, of course, it could be argued that aligning with Renault, given its global partnership with Nissan and Mitsubishi, offered greater scale for future cost savings - plus the sharing of platforms and technology, a better handle on Asia and more overlap in the crucial U.S. market. Peugeot, by contrast, is a mostly-European affair.

The crucial and not insignificant difference is that Peugeot has a Marchionne-like chief executive at the helm: Carlos Tavares. The French-educated Portuguese executive is an acolyte of Nissan-Renault boss Carlos ‘le cost-killer’ Ghosn, who is now under house arrest in Japan on corruption charges, which he disputes. Besides Marchionne and Ghosn, Tavares has perhaps the best track record in the car industry for crunching costs and driving returns.

Since taking over in late 2013, Peugeot shares have chalked up a total return of some 260%, including dividends, according to Eikon. That compares to a 28% total return for General Motors and a negative 9% performance for crosstown rival Renault. Not only did Tavares manage to steer the French company out of a ditch and through a bailout that brought Dongfeng and the French state into its capital. He also went on the offensive, purchasing GM’s European arm, Opel Vauxhall, in 2017. Quicker than anyone expected, he turned it around.

The biggest flaw of the Renault-Fiat arrangement, aside from pesky cohabitation with the French state, was the absence of a hands-on operator at the helm. That deal, which blew up in June over objections by President Emmanuel Macron’s government, proposed Jean-Dominique Senard as chief executive. While competent when he ran tyremaker Michelin, at 66 years of age it was a stretch to imagine Senard rolling up his sleeves for the three to five years that a deal of this dimension would require. At 61, Tavares has those years to spare. He signed a five-year deal.

The Peugeot deal may also prove preferable to an earlier attempt, back when Marchionne was still alive, to effectively sell to GM. Months after his confessional, the Fiat Chrysler chief, in tandem with Elkann, proposed a combination which the Detroit behemoth led by Mary Barra rejected. Instead, she said in June 2015, “we are merging with ourselves”. GM shares have pretty much flat-lined ever since.

With the arrangement unveiled today between Fiat Chrysler and Peugeot, Elkann has further built on the legacy of his formative mentor, whose turnaround work effectively salvaged his family’s wealth. Elkann’s relationship with Tavares won’t be the same. But as chairman and shareholder of reference, he can help the Fiat-Peugeot chief executive to make good on Marchionne’s theories - and perhaps nudge the industry to do the same. 


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