October 30, 2019 / 7:32 AM / 18 days ago

UPDATE 5-Fiat Chrysler and Peugeot in talks over $50 billion tie-up

* Combined company would be 4th largest in world

* Fiat-Renault talks collapsed earlier this year

* Deal may be announced as early as Thursday -source (Adds details of the potential deal, including potential dividend to FCA shareholders; adds details on expected board composition)

By Giulio Piovaccari and Gwénaëlle Barzic

MILAN/PARIS, Oct 30 (Reuters) - Talks between Fiat Chrysler and Peugeot owner PSA over a potential tie-up that could create a $50 billion car giant gathered pace on Wednesday, with one source saying a deal could be announced as early as Thursday.

The two groups said in separate statements they were holding discussions aimed at creating one of the world’s leading auto makers, better placed to tackle a host of costly technological and regulatory challenges facing the global auto industry.

Under the proposed deal Fiat Chrysler would pay shareholders a 5.5 billion euro special dividend, people familiar with the discussions said.

Peugeot would spin off its stake in auto parts maker Faurecia valued at around 3 billion euros while Fiat Chrysler could dispose of its stake in factory robot maker Comau valued at about 250 million euros, these people said. Final terms of the agreement could change and have not been formally disclosed, they said.

The combined company’s board of directors would have 12 members - five from Peugeot’s side, five from Fiat Chrysler’s, along with chief executive Carlos Tavares and as chairman, John Elkann, currently chairman of Fiat Chrysler, the people said.

Both companies have called unscheduled board meetings on Wednesday to discuss the potential deal, the people said, while one source familiar with the discussions said an agreement could be announced as soon as Thursday.

Spokespeople for Fiat Chrysler Automobiles (FCA) and PSA declined to comment on a timeline.

After ditching a proposed merger with Renault in June, Elkann confirmed the group’s bid to pursue an alternative alliance as carmakers face huge investments in electrification, emission reduction and autonomous driving technologies.

Milan-listed shares in FCA rallied more than 10% on Wednesday, after ending up more than 7.5% on Tuesday in New York. Peugeot share rose more than 6% to hit their highest in more than 11 years.

The merged entity would still face substantial challenges, as auto manufacturers grapple with a global downturn in demand while trying to develop costly, cleaner car models as deadlines to meet ever more stringent anti-pollution rules loom.

A combination of PSA and FCA would have to overcome a series of political, financial and governance hurdles, though it elicited an encouraging early response from the French government, a key PSA shareholder.

France’s dithering over FCA’s pursuit of Renault - in which it is also a shareholder - contributed to the collapse of that merger plan.

French government spokeswoman Sibeth Ndiaye said Paris was following the PSA-FCA talks closely with an eye on the fallout for jobs, but said an enlarged group was ultimately “the best path to protecting employment.”

The tie-up would leave France with two major players in the global industry, as opposed to the Renault-FCA-Nissan configuration, which left PSA trailing.

Morningstar senior equity analyst Richard Hilgert said in a note that total volumes of FCA and PSA, including China joint venture partners, amounted to 8.7 million vehicles last year, ranking the eventual combined group fourth behind Volkswagen , Toyota and the Renault-Nissan alliance , each at more than 10 million vehicles.

“We view the combination of these two companies as reasonable given global competition, high capital intensity, and industry disruption from electrified powertrain as well as autonomous technologies,” Hilgert said.

JOBS FEARS

Italy’s industry minister, Stefano Patuanelli, said on Wednesday that Rome - which has no stake in FCA - was following talks between the two groups, but declined to comment further on a “market operation”.

Rome is keen to avoid major job losses in Italy, where 58,000 workers are employed by FCA, and with most of its Italian plants heavily underused. Italian trade union FIOM said it was concerned a tie-up with PSA could hit jobs in the country even more than a Renault merger.

In Britain, unions flagged their worries for PSA plants there, which make vehicles under the Vauxhall and Opel brands.

In addition to the French government’s 12% shareholding in PSA, held via state bank BPI, the Peugeot family and the Chinese government, through Dongfeng Group, each have a similar holding.

Dongfeng could use a merger deal to cash out of PSA, two sources close to the talks said. Dongfeng declined to comment. Speculation it was looking for an exit surfaced in August.

EMISSIONS CRUNCH

The talks come as European carmakers struggle to meet tough carbon dioxide emissions targets.

Strategy firm PA Consulting has forecast FCA faces a fine of 700 million euros ($777 million) unless it radically changes its emissions profile to sell more electric and hybrid cars.

FCA’s first full-electric model, the small 500 BEV, is scheduled to reach customers next year. But a combination with Peugeot would give the carmaker access to PSA’s CMP modular platform, which has already spawned the Peugeot e-208 and the Opel Corsa-e mini.

MORE ADVANTAGES

Investors have speculated for years that FCA, itself the product of an Italian-U.S. merger, was hunting for a further partner, encouraged by the rhetoric of the company’s late chief executive Sergio Marchionne.

FCA, controlled by Exor, the holding company of Italy’s Agnelli family, had discussed a combination with PSA earlier this year, before it proposed a $35 billion merger with Renault.

At that time, FCA said a deal with Renault offered more advantages than a combination with PSA, but Elkann, a scion of the Agnelli family, broke off talks after the French government’s intervention.

Lazard is advising Exor, Goldman Sachs is advising FCA, and Mediobanca is advising PSA through its Messier Maris & Associés unit, sources said.

($1 = 0.9000 euros)

Reporting by Giulio Piovaccari and Gwenaelle Barzic Additional reporting by Gianluca Semeraro, Stephen Jewkes and Silvia Aloisi in Milan, Sudip Kar-Gupta in Gdansk, Sarah White in Paris, Josh Franklin in New York and Pamela Barbaglia in London; Editing by Mark Potter and Leslie Adler

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