Fiat eyeing PSA Peugeot-Citroen merger - report

[Plex]

Could team up to battle VW

Rumors of a Fiat / PSA Peugeot-Citroen merger have been circulating for years, but a new report is giving credence to the speculation.

In a recent interview, Fiat CEO Sergio Marchionne told Automotive News he would "certainly take a look" at PSA. He also said Europe needs a giant automaker to tackle Volkswagen's massive 23.3 percent market share.

A day later, PSA's Frederic Saint-Geours commented they are "completely open" to an alliance "but you have to find the right partner."

Regardless of whether or not the two companies tie up, experts say both need to increase spending on research and development if they ever want to catch Volkswagen.


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[Plex]

Fiat, Peugeot may need tie-up to compete with Germans

(Reuters) - Having long resisted the overtures of rival Fiat (FIA.MI), PSA Peugeot Citroen (PEUP.PA) may decide that an alliance, fraught with difficulties though it may be, is the only way to close the widening gap with European market leader Volkswagen (VOWG_p.DE).

The German carmaker's investment firepower and geographic reach mean the weaker players risk falling further behind if they don't team up to cut capacity and share the costs of developing new cars.

"Peugeot definitely needs more scale," London-based UBS analyst Philippe Houchois said. "They resisted the idea for a long time, but now it's caught up with them."

VW is already out-spending its Latin cousins, with plans to invest 62 billion euros in new models in 2011-2016.

That contrasts with PSA's 3.7 billion euros in average annual spending on investment, research and development for 2008-11, according its last annual report, and 26 billion euros earmarked for 2010-14 by Fiat and Chrysler, the Italian carmaker's U.S. partner since its 2009 rescue.

Market trends bode ill for them, with Western European demand seen shrinking by 6 percent in 2012 likely to make for fierce competition on price, even as carmakers battle to gain ground in key markets like Brazil, Russia, India and China.

While both have enough cash to ride out the 2012 slump and beyond, in the long term they may struggle to keep investing, starving them of the technological prowess they need to compete.

"Nobody wants more exposure to Europe, but if you're already there then you need scale," noted UBS's Houchois.

Data from LMC Automotive shows Europe accounted for 45 percent of Fiat sales in 2011 and 54 percent of PSA's, the highest share among major automakers.

Both companies far outpaced Europe's 1.4 percent market decline, with Fiat deliveries falling 12 percent and PSA's 9 percent, while VW shrugged it off with an 8 percent surge. BMW (BMWG.DE) and Hyundai-Kia (005380.KS) (000270.KS) also gained.

Speaking at the Detroit auto show on January 11, Fiat and Chrysler Chief Executive Sergio Marchionne said he would "certainly take a look" at PSA, adding that Europe needed a new car giant able to rival Volkswagen's 23.3 percent market share.

He denied a newspaper report that talks were underway.

With Renault (RENA.PA) already allied to Nissan (7201.T) and pursuing joint programs with Daimler (DAIGn.DE), PSA is the only standalone volume manufacturer that would come close to fitting the bill for Fiat, claiming 12.4 percent of European car registrations to the Italian company's 7 percent last year.

But a tie-up between the two is easier said than done.

"Marchionne likes throwing out ideas but I'm not sure this one fell on fertile ground," said London-based Societe Generale analyst Stephen Reitman.

PSA declined to respond directly to Marchionne's remarks or comment on specific consolidation options.

While Fiat suffers from excess capacity, PSA production is spread among French plants that are too small and costly to stay profitable in the event of a price war, UBS's Houchois said.

European carmakers, rescued by government loans and scrappage schemes in the 2008/2009 global financial crisis, are facing Europe's latest economic woes without state help as austerity measures bite, but that may also give them a freer hand to revamp their operations and workforces.

Fiat and PSA held inconclusive partnership talks in late 2008, when Fiat was combing the globe for the alliance that eventually led it to Chrysler.

The French automaker is "completely open" to any alliance that boosts performance while preserving its independence, no. 2 executive Frederic Saint-Geours said the day after Marchionne's comments. "But you have to find the right partner."

One company insider said PSA saw a tie-up as a "social and industrial catastrophe." But the controlling Peugeot family may be running out of options.

PSA, which had 1.65 billion euros of industrial net debt as of June 30, is expected to report a significant full-year auto division loss on February 15 after repeatedly slashing targets. Fiat is also expected to cut its 2012 targets.

Still, the automakers could benefit in the longer term from pooling their strongest products, said Thierry Huon, an analyst with Exane BNP Paribas.

The Peugeot 308 and Citroen C4 would bolster Fiat's weak compacts, and PSA lacks its own mini offering where the Fiat Panda excels, he said. "There's plenty they could do together, but first they should put their own houses in order."

Fiat is interested in sharing an A and B platform, Marchionne said in Detroit, enabling it to save billions on development costs. Fiat's Punto and the Opel Corsa share a B platform developed with General Motors (GM.N), which still has another product cycle of seven years left in it. The A platform, used by the best-selling Panda, will need to be replaced sooner.

PSA and Fiat are respectively the worst and second-worst 12-month performers on the Stoxx 600 European autos and parts index .SXAP. Shares in the French company are trading at about 2.7 times earnings, compared with 4 times for Fiat stock.

Company officials say Fiat and PSA have not resumed the tentative alliance talks of 2008. Unlike the Peugeots, Fiat's Agnelli clan is on the record as open to deals that make sense even if their holding is diluted to the point of ceding control.

Indeed, it was Agnelli heir John Elkann who reached out to the Peugeot family in late 2008, making public his family's willingness to enter a game-changing partnership as secret talks with Chrysler intensified behind the scenes.

"There are just too many carmakers in Europe," said Gregory Moore, a Paris-based fund manager with Montsegur Finance, which has Peugeot stock among 150 million euros in assets under management and increased the holding in November.

"One way or the other, there will have to be mergers."

Reuters