Fiat Chrysler's $ 40 billion merger with Renault is no deal

The $ 40 billion merger proposed by Fiat Chrysler with Renault, which would create the world's third largest automaker, is far from a fact.

According to Moody's Investors Service, the merger, announced Monday, involves "significant risks of execution" that could ruin it completely. If the deal is concluded, it will take at least a year and up to 18 months, according to a Fiat Chrysler official informed of the negotiations.

Both companies have complex business models – particularly the alliance of French automaker Renault with Japanese automakers Nissan Motor and Mitsubishi – and powerful leadership teams, which complicates the choice of leaders of the new company, said Joe Phillippi, president of AutoTrends Consulting.

The transaction comes at a critical time for car manufacturers. Global sales are slowing after nine years of growth and the industry is seeking extraordinary amounts to invest in autonomous driving and electric vehicles.

Jim Press, the former deputy general manager of the Chrysler Group, described the deal as a "historic contract" that will likely be followed by other players in the sector.

"The consolidation of the global automotive sector is something that must happen," he told CNBC's "Closing Bell" on Tuesday. "The pressure on profits is growing at a time when the investments required for new autonomous vehicle technology and the electrical transition are all adding to the investment."

The Italian-American manufacturer has proposed to Renault a 50/50 joint merger that would create an 11-member board split equally between Renault and Fiat Chrysler, a seat for Nissan. Fiat Chrysler shareholders would receive a special dividend of 2.5 billion euros (about $ 2.78 billion) to account for the Fiat Chrysler stock appreciation. Existing shareholders of both manufacturers would get half of the merged company.

Fiat Chrysler said that this deal would save an average of about 5 billion euros (about $ 5.57 billion) a year without the closure of any factory, which is an important detail which should help simplify the deal with unions, policymakers and regulators. French Finance Minister Bruno the Mayor told RTL radio on Tuesday that he wanted "four guarantees", including "the preservation of jobs and industrial sites in France".

The agreement is considerably complicated by the role of the French manufacturer in the Renault-Nissan-Mitsubishi alliance. Together, the alliance forms the world's second largest automotive group with 10.8 million vehicles sold in 2018. Renault's merger with Fiat Chrysler would create the world's third-largest car maker, with an annual business figure of 8.7 million d & # 39; euros.

The alliance itself is on fragile ground since its long-time leader, Carlos Ghosn, was arrested in November for what is considered by many to be a coup orchestrated by Nissan, which accuses him of a series of financial misdeeds.

"It's falling quickly," said a senior alliance official, who asked not to be identified because internal discussions are private. He said the operation "could separate" in the coming months, with Fiat Chrysler's merger proposal coming on top of current tensions.

The alliance, originally created between Renault and Nissan, was formed 20 years ago when the French manufacturer invested $ 5.4 billion to prevent the Japanese manufacturer, then failing, to sink. Renault took control of Nissan and subsequently carried it to 43.4%. The Japanese manufacturer, meanwhile, holds a 15% stake in its ally. Over the past two decades, Renault and Nissan have claimed to develop a tightly interwoven business relationship, including two sharing platforms, engines and other technologies, as well as parts purchases.

Ghosn is a powerful and charismatic automobile executive who wore many hats until his arrest. He was head of the alliance, was president of Nissan and CEO of Renault. Due to the structure of the alliance, however, the two companies did not get all the expected benefits, Ghosn said. Their engineering units, for example, still operate largely independently, said the alliance executive.

This is partly the reason why, in the year before his arrest, Ghosn attempted to orchestrate a complete merger between Renault and Nissan, which many leaders believe could have contributed to the decision of the latter to continue.

Nissan has made it clear that it does not want to merge with Renault, rejecting a new attempt to merge the French automaker last month. The new Fiat Chrysler proposal would effectively put these projects on the back burner. Nissan and Mitsubishi would touch about 1 billion euros a year in "synergies" from the merger, Fiat Chrysler announced on Monday.

The leaders of the three alliance companies met Wednesday at Nissan headquarters in Yokohama for a meeting scheduled in advance. Japanese newspaper Nikkei said Nissan was not opposed to the deal, while noting that "many details need to be resolved," citing an unnamed Nissan executive who had attended the meeting.

Since the arrest of Ghosn, Nissan CEO Hiroto Saikawa has met several times with senior Renault officials. Both parties tried to give a positive face to their relationship. But Saikawa pointed out internally that the Japanese automaker did not want a full merger yet, said the alliance official, adding that "pride and arrogance" on the part of "leaders of both companies" complicate things more and more. hold the group together.

Ghosn has actually started merger talks in 2008 between Renault and Nissan with what was just Chrysler at the time it was about to insolvency, said a former Chrysler executive involved in these negotiations. The effort failed because of the troubled financial unit of the American manufacturer during the financial crisis.

"The rapprochement between Chrysler and Renault was logical in 2008," the press said in a separate interview. He should know, as a vice president and co-president of Chrysler at this time. "It makes even more sense today, given the strength of Fiat Chrysler's market [in SUVs and pickups] and their similar cultures that would make them particularly well suited to work together. "Press is now leading the RML Automotive dealer network.

One of the issues raised by the proposed merger is how the new management structure would be modified. According to the consensus, John Elkann, president of Fiat Chrysler, will assume the same functions within the new company, said analysts and industry leaders. Elkann is the heir to Fiat's founding family, the Agnellis, who currently hold 29% of the builder's capital and 44% of the voting rights. Elkann played a crucial role in the merger.

"He has the phone book," said one of the leaders informed of the negotiations. Elkann is also essential to help smooth the approval of the French government, which holds 15% of Renault's capital, said these people.

Renault president Jean-Dominique Senard is the most likely candidate for the new company's CEO, analysts and industry leaders said.

We could argue the role of President No. 3 between the current CEOs of both companies: Thierry Bollore at Renault and Mike Manley at Fiat Chrysler.

Manley has handled much of the most important details of the deal, said the executive informed of the negotiations. Some questions have however been raised in the press regarding the timing of its rise shortly after the untimely death of former CEO Sergio Marchionne last summer. Manley currently enjoys significant support from the manufacturer's board of directors, according to industry analysts and executives.

Bolloré was a long time colleague of Ghosn, although it currently weighs far less weight than a year ago. European newspapers reported that Bollore's own promotion was also controversial, following the unexpected arrest of Ghosn last year, and caused tensions within the board of directors.

The way in which operations and production might come together is a question to be answered. Among other things, would the new entity maintain the broad portfolio of brands currently in place? As part of the five-year plan presented by Marchionne in June 2018, the two brands of the same name have been significantly reduced, which has led many analysts to question the length of their existence. In recent months, as sales continued to decline, many began to speculate that the Fiat brand may soon be withdrawn from the US market.

The other uncertainty is Alfa Romeo. Under the current plan – as in the previous one – this Italian brand receives billions of dollars in product development funding. But sales of new models such as the Giulia sedan and the Stelvio SUV have been disappointing.

"At least for the moment, we intend to continue to follow the five-year plan," said Fiat Chrysler's executive. What could happen after a merger is another matter.

Fiat Chrysler's proposed merger with Renault has surprised many observers. After being named to replace Marchionne last year, Fiat Chrysler's Manley seemed to downplay his mentor's efforts to find a partner.

"I think partnerships and alliances are important and that they will continue," said Manley at a media roundtable at the International Auto Show. North America, in January. "If there is [are] ways to get better returns for our capital, if there are [are] To reduce costs, we are always open to people talking to us. "

In fact, he was already in talks with the second largest French automaker, the PSA Group, according to Fiat Chrysler 's executive. But when its managing director, Carlos Tavares, seemed to forget the possibility of a merger, Fiat Chrysler quickly turned to Renault.

– CNBC Michelle Fox contributed to this article.