Fiat Chrysler Automobiles
work on a merger that brings Fiat Chrysler into the alliance Renault-Nissan-Mitsubishi Motors, which sells nearly 11 million light vehicles annually.
The biggest impact of the deal, if approved, will be felt across the Atlantic. The combined company will become the second largest in Europe – including
Sales volume in Europe (Ticker: 7201.Japan) – just behind
Investors should not underestimate the impact on North America. It is possible that the Jeep or Dodge brands of Fiat – or both – are offered for sale. Even if this is not the case, a broader revolution in the auto industry is starting as companies adapt to the rise of electric vehicles. A shift that makes economies of scale more critical.
"[The impact on] North America would depend on future integration with Nissan," explained Seaport Global Analyst Mike Ward opposite Barron's . "It will be interesting to see if the US assets remain with the new company, and Jeep and Dodge are probably worth much more on their own and off the unit."
That's a fascinating idea, a Fiat spokesman said it's too early to talk about how things will turn out.
Fiat Chrysler Automobile
(FCAU) has an enterprise value – the sum of its debt and market capitalization – of approximately $ 24 billion. The total is $ 28 billion, including the company's pension obligation. (Pension obligations are typically high in relation to the size of automakers' businesses, and some analysts include them in their market value calculations.)
$ 28 billion is only two-fold estimated earnings before interest, taxes, depreciation and amortization for 2019 ebitda. That's a 80% discount on the
Dow Jones Industrial Average
Review multiple and 40% off
Adding Jeep or Dodge to a larger US franchise could unlock a significant value.
European investors like the idea of a larger automaker with a higher regional market share. Renault (RNO) shares rose 12% on Monday and Fiat Chrysler's shares were up 8%. The shares of both automakers rose again on Tuesday in European trade.
Of course, there is no guarantee that a deal will be made, and even then, it is difficult to achieve cost savings in large automotive mergers. The Fiat press release stated that no production facilities should be shut down.
That's smart to say. Politics plays a big role in the automotive industry.
Car companies are big employers and governments are very interested in employment levels and layoffs. Governments are also occasionally major automotive shareholders. The French government holds a 15% stake in Renault and the state of Lower Saxony in Germany 20% in Volkswagen.
Politics is one reason why partnerships – such as the 1999 Nissan Renault Mitsubishi Motors alliance – are more common than large transformation fusions.
Nevertheless, partnerships pursue similar goals to typical mergers: increasing scope and reducing costs. In the past, the auto industry was less interested in competing for manufacturing costs and instead was content to compete in the performance of brands and powertrains.
They do not care if they pass on manufacturing best practices to their competitors. Do not forget,
TM and GM have been manufacturing cars together for decades at the factory near Fremont, California, which produces today
Monday's news from Fiat Chrysler-Renault might encourage other automakers to do business, but activity has already increased. Ford and Volkswagen announced a commercial vehicle partnership in early 2019 and agreed to develop commercial vehicles and mid-size pick-ups for global markets.
With the electrification of the powertrain, where batteries and electric motors replace gasoline engines and transmissions, a major difference between automakers disappears. The conversion is more about car manufacturing than cost and less about the performance of petrol engines. This means that scaling achievable through mergers and partnerships is more important and internally developed engine technology less important.
Performance will continue to be important, but range, charge time and battery life are dependent on non-automotive technology. Car companies can buy their batteries from many independent manufacturers, which makes the in-house technology less critical.
It's a shift from the way the auto industry has worked in the past: automakers have produced their own engines. Therefore, there is only one independent engine manufacturer:
(CMI). It makes engines for heavy trucks and has a small company that makes diesel engines for pickup trucks.
No major mergers may be announced, but Barrons would bet on more deals.
Here is an overview of the existing automobile partnerships:
- The Nissan, Renault and
(7211.Japan) Allianz includes cross-company shareholdings. Nissan owns 15% of Renault and 34% of Mitsubishi. On the other hand, Renault owns 43% of the outstanding shares of Nissan.
- Fiat Chrysler also works with Waymo, the autonomous driving company founded by Google's parent company
(HMC) and GM also cooperate in the autonomous driving technique. Honda and Japan
(9984.Japan) are also investors in GM's Cruise Autonomic Driving Unit.
- SoftBank and
(TM) had a mobility service company – much like
(UBER) – since 2018. Honda joined the partnership in 2019.
(BMW.Germany) are partners in a separate mobility service.
- And do not forget that almost every major global automaker has a Chinese partner because the Chinese government prefers it. Until recently, foreign automakers did not own a majority stake in local plants that produced foreign brand cars for the Chinese market. BMW, Volkswagen,
(UG.France) and GM all have major Chinese joint ventures.
Write to Al Root at [email protected]