Fiat billionaires get to keep their Peugeot sweetener

The merger of Peugeot SA and Fiat Chrysler Automobiles NV is the largest transaction involving two carmakers since the takeover of Chrysler by Daimler AG some two decades ago.

It’s the most dramatic response yet by the industry to the demise of the combustion engine and the massive expense of investing in electric vehicles. So why aren’t investors more excited? Peugeot shares have fallen about 10% since news of the talks with Fiat first leaked at the end of October. Fiat’s have gained about 16%.

Before the deal emerged, Peugeot was valued more highly than Fiat but that has reversed. Peugeot investors think Fiat is getting a better deal and they don’t seem to believe the merger will create much value.

And, in fairness, the history of automotive mergers isn’t a happy one: Daimler and Chrysler’s failed marriage is a textbook example of the culture clashes that supposed “mergers of equals" can spawn. Yet Peugeot and Fiat seem much closer philosophically — both sets of managers are firmly committed to creating value for shareholders, something you can’t always says of large manufacturers —and they have ample reason to try to make this tie-up work.

The memorandum of understanding unveiled on Wednesday atleast attemptsto addressPeugeot investors’ frustration with the initial deal terms. Fiat will still pay its shareholders —including the billionaire Agnelli family — an extremely generous 5.5 billion euro ($6.1 billion)special dividend before the deal closes, even though its balance sheet is comparatively weak and it’s exposed to far greater legal risks (involving diesel, tax and alleged trade union malfeasance). Peugeot shareholders will get a distribution worth around 3.2 billion euros.

To try to balance things out a little, Fiat plans to keep its holdings in robot-maker Comau until after the deal closes, meaning an estimated 250 million europroceeds from a sale will be shared equally by both sets of shareholders.

Even so, the French side is being very generous financially in exchange for gaining control of the boardroom.Peugeot boss Carlos Tavares will have the casting vote.Is it worth it?

Tavares has shown it’s possible to make money in Europe, where Peugeot sells 80% of its vehicles. But thecontinent is probably going to be a brutal market for the next few years. Carmakers there may be obliged to offer big discounts to persuade customers to purchase electric vehicles and thus help the automakers avoid regulatory fines. Peugeot’s impressive margins —it achieved an 8.7% automotive operating margin in the first half of 2019 —might not last forever.

By contrast, Fiat’s North American truck and SUV business accounts for about two-thirds of its revenue and shouldn’t be as vulnerable to regulatory upheaval.President Donald Trump isn’t a fan of stringent fuel economy rules.

The two parties are ruling out plant closures but still expect to generate 3.7 billion euros in yearly cost-savings.Taxed, capitalized and adjusted for the cost and time the savings will take to achieve, these are worth around 4 billion euros to each side.

Tavares’s record of turning round businesses is certainly impressive.He transformed Peugeot and then repeated the trick with the Opel/Vauxhall unit acquired from General Motors Co. Fiat won’t offer as many quick wins: The Italian carmaker has already slashed costs and optimized its working capital. But savings from common vehicle platforms and purchasing could be substantial.

It’s probably unrealistic to expect shareholders to price in all the promised benefits now. Tavares will have to show them that not all marriages are doomed to fail.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.