FCA and PSA Group taking next steps towards merger, sources say

Fiat Chrysler Automobiles' board of directors has approved movingforward with talks to merge with French automaker PeugeotSA Group, a person familiar with the situation said onWednesday.

Peugeot's board approved moving forward with the discussionsearlier on Wednesday. The companies have not announced a formalagreement to pursue a combination.

Fiat Chrysler will payits shareholders an approximately $8.07 billionspecialdividend under a proposed tie-up scheme with French rivalPeugeot, two sources close to the matter said.

The proposed deal also anticipatesthat Peugeot will spin offits 46 per centstake in car part Faurecia, worth around $4.4 billion, the sources said.

The combined group would have an 11-strong board, with sixmembers coming from Peugeot including CEO CarlosTavares, and five from FCA including board chairman John Elkann,according to the draft plan.

Under the plan, whose terms are still tentative, FCA willalso spin off its automation unit Comau, worth approximately $366.7 million, the sources added.

FCA declined to comment, Peugeot owner PSA could not beimmediately reached for comment.

Merger talks confirmed early Wednesday morning

Italian-American carmaker Fiat Chrysler Automobiles previously confirmedon Wednesdayit was in talks with PSA, its second bid this year to reshape the global auto industry which is facing huge challenges with the transition to electric and autonomous vehicles.

The statement said the discussions were ongoing "aimed at creating one of the world's leading mobility groups," but didn't specify whether the goal was a full merger or a looser alliance. At the time, no further details were given. PSA Peugeot put out a similar statement.

Shares in Fiat Chryrsler shot up nearly nineper cent, just a day before it releases its third-quarter earnings, while Peugeot shares surged sixper cent.

The merger will create the fourth-largest automaker with the potential for big savings in Europe just as the industry struggles with slowing sales and the need to invest heavily in new technologies like electric cars. But a deal does not help either in expanding in China, the world's largest market, where both are weak, analysts said.

Fiat Chrysler has long been looking for a partner to help shoulder investments in the capital-heavy industry, under the outlook that failure to consolidate would inevitably lead some companies to fail.

Talks this year with another French carmaker, Renault, to create what would have been the third-largest carmaker broke down over French government concerns about the role of the Japanese partner Nissan and criticisms from Renault's leading union.

German analyst Ferdinand Duedenhoeffer, head of the Center for Automotive Research, said the French government is unlikely to play the spoiler role again, both because it would be an unpopular move and because its role in Peugeot is weaker.

But he said they would insist that inevitable job cuts not be made in France, which will expose Opel, which Peugeot bought in 2017, as the sacrificial lamb in any merger deal. Opel is based in Germany.

The real problem the carmakers face will be in China, which represents the future for most automakers.

"FCA and Peugeot are both lousy in China, they just lose money," Dudenhoeffer said. "I think they have to find a solution but it will be a big challenge."

Possibly complicating things, the Chinese government has a stake in Peugeot through Dongfeng Motors. Dongfeng, the Peugeot family, and the French state investment bank BPI France each have 12.23 per cent of capital and 19.5 per cent voting rights in Peugeot.

Dongfeng had no comment on the talks, while a French Finance Ministry official said the government was monitoring developments and that it would be "vigilant" on maintaining Peugeot's industrial footprint in France.

The Italian government said only that it was monitoring developments.

PSA now Europe's No. 2 automaker after bailout

Fiat Chrysler Automobiles was formed in 2014 out of a merger of Italian carmaker Fiat and the American company Chrysler, which Fiat brought back from the brink of bankruptcy. It is controlled by the Fiat-founding Agnelli family, represented in FCA by chairman John Elkann who spearheaded the Renault talks. His role in these talks has not been disclosed.

His role in the current talks has not been confirmed, but both Fiat Chrysler and Peugeot have been controlled by families since their formation Peugeot started making cars in 1896 and Fiat three years later which could contribute to a climate of mutual understanding.

A merged carmaker would have combined sales of nearly 10 million a year, based on 2018 results. By comparison, both Volkswagen and Toyota sell over 10 million cars a year, while the Renault-Nissan-Mitsubishi alliance almost 11 million.

Fiat Chrysler has a larger global footprint than Peugeot, whose focus is on Europe where it is the second-largest carmaker.

While Fiat Chrysler last year sold 5.8 million cars globally, it makes the lion's share of its profits in the United States and has been struggling in Asia and Europe. Peugeot sold 3.9 million cars last year and is looking to move into the United States.

Fiat Chrysler is making a concerted push into electric and hybrid vehicles, where it has lagged, focusing in particular on its premium brands Alfa Romeo and Maserati.

PSA has performed a remarkable turnaround in recent years, going from one of the industry's sicker car companies to one of its more powerful. That's notably thanks to an unusual $4.1 billion bailout in 2014 in which Dongfeng and the French state gained equal shares to the family that founded Peugeot 200 years ago.

A merger could see the Chinese government take a role in a company that includes Chrysler, a U.S. industry icon. That comes on top of Fiat Chrysler owning a joint venture with another Chinese company, GAC.

"The Chinese government doesn't want to have a strong connection with an American company," Dudenhoeffer said, due to economic damage brought by the Trump administration's tariffs.

In 2017, PSA bought General Motors' Opel and Vauxhall brands for $2.33 billion, making it Europe's No. 2 automaker after Volkswagen.

PSA is now planning to reintroduce Peugeot cars to North American markets as part of a plan that includes a car sharing service introduced in Washington last year.