Fiat Chrysler and Peugeot agree to merge, creating world’s fourth-biggest carmaker

Fiat Chrysler Automobiles and France’s PSA Peugeot said Thursday that they have agreed to merge. The combination would create the world’s fourth-largest automaker with enough scale to confront big shifts in the industry, including a race to develop electric cars and driverless technologies.

Italian American Fiat Chrysler brings with it a strong footprint in North America, where it makes at least two-thirds of its profits, while Peugeot is the second-biggest automaker in Europe.

Both lag in China despite the participation of Peugeot’s Chinese shareholder, Dongfeng. And they are playing catch-up in developing electric vehicles, which is expensive and considered essential as governments impose tougher emissions limits.

The deal would seek to pool resources and gain strength in scale.

The combined company would be worth $50 billion, with annual revenue of about $190 billion. It would produce 8.7 million cars a year — just behind Toyota, Volkswagen and the Renault-Nissan alliance, which make more than 10 million each.

Fiat Chrysler’s U.S.-traded shares rose 2.3% on Thursday. Peugeot shares, traded in Paris, sank 12.9%.

Philippe Houchois, an analyst at research firm Jeffries, called the agreement “the most logical and attractive combination in autos.”

While the two sides have called the deal a 50-50 merger, Houchois estimated that Peugeot is paying a hefty 32% premium to take control of Fiat Chrysler.

Peugeot Chief Executive Carlos Taveres will be CEO, and he will hold the 11th seat on the otherwise evenly divided board. Fiat Chrysler’s chairman, John Elkann, will become chairman of the new company. The role of FCA’s CEO, Mike Manley, is murky. Manley, who replaced the late Sergio Marchionne last year, didn’t get a title in the combined company but will have an unspecified senior executive role.

The merger is expected to offer savings of $4 billion, which the automakers expect to achieve without closing any factories — a concern of unions in both France and Italy, where the carmakers have more overlap.

Fiat Chrysler’s strongest brands are Jeep SUVs and Ram pickup trucks. It is working on relaunching its premium and luxury brands, Alfa Romeo and Maserati, with a focus on hybrid engines. It still makes smaller cars under the Fiat marquee, mostly for the European and Latin American markets.

Peugeot makes mostly small, city-friendly cars, family sedans and SUVs under the nameplates of Peugeot, Citroen and Opel. That is where the companies can expect to have the most overlap.

“This convergence brings significant value to all the stakeholders and opens a bright future for the combined entity,” Tavares said in a statement.

Manley called it “an industry-changing combination” and noted the long history of cooperation with Peugeot in industrial vehicles in Europe.

The combined company would be able to share in the cost of developing electric cars and autonomous driving, among other things, as well as to save on investments in vehicle platforms.

European automakers have been looking to mergers and alliances for years to share R&D costs and tackle the issue of overproduction on the continent.

“We have to face the challenges of electric cars and autonomous cars. To face this you need to have champions at the world level,” French Finance Minister Bruno Le Maire told reporters.

The French government has a stake in Peugeot through its investment bank and just five months ago scuttled a similar deal between Fiat Chrysler and French automaker Renault. There were no signs of resistance to this deal beyond concerns for jobs.

Le Maire also wants the combined company to help create a European electric battery industry, which could help European carmakers reduce their dependence on U.S. and Asian battery technology.

The French state investment bank currently has a seat on the PSA board; Le Maire declined to answer at a news conference whether it would be retained.

Italy’s prime minister, Giuseppe Conte, says he would welcome any merger agreement that improves productivity of Italian plants, guarantees jobs and preserves investments.

Fiat Chrysler is one of Italy’s largest-private sector employers, with nearly 60,000 workers. The company has pledged to invest heavily in new engines and models in Italy to make better use of its plants.

Because of the overlap in European operations and product, there is concern among unions about job cuts, though the companies have promised to not close any plants.

The new company would continue to have offices in France, Italy and the United States, and shares would be traded in all three countries. The parent company would be based in the Netherlands, as is currently the case with Fiat Chrysler.

Both companies have strong shareholder participation by the founding families — the Peugeots in France and the heirs to the Agnelli family in Italy, represented by Elkann.

As part of the agreement, the main shareholders — the Peugeots, the Agnelli family investment arm Exor, as well as the Chinese investor Dongfeng and the French state investment bank — agree to maintain their stakes for seven years. The only exception is that the Peugeots could increase their stake by up to 2.5% during the first three years by buying shares from Dongfeng and the French investment bank.

The next step in the deal is expected to be a signing of a memorandum of understanding, which could come before the end of the year.