Peugeot and Fiat Prepare Merger Agreement for Next Week

(Bloomberg) -- Fiat Chrysler Automobiles NV and Peugeot maker PSA Group are aiming to sign a formal agreement next week to combine and form the world’s fourth-biggest car manufacturer, according to people familiar with the matter.

Progress is being made on the memorandum of understanding even though some outstanding issues still have to be resolved, said the people who asked not to be named because the information isn’t public.

Ways to assess potential Fiat liabilities that have come to light since a broad outline of the accord was unveiled Oct. 31 are still under discussion, they said, adding that more than 100 managers are participating. PSA has planned a board meeting Tuesday to consider the deal, one person said.

Representatives for Fiat and PSA declined to comment. The companies had said they aimed to sign an accord before the end of the year.

Following the unveiling of the merger plan, rival General Motors Co. hit Fiat with a blockbuster racketeering lawsuit alleging a bribery and corruption scheme. Fiat has called the accusations meritless. JPMorgan analysts have estimated GM is likely to seek at least $6 billion in damages, with the extreme scenario being as much as $15 billion.

In a separate development, Italian tax authorities claimed Fiat underestimated the of its American business by 5.1 billion euros ($5.7 billion) following its phased acquisition several years ago. Fiat has said it strongly disagrees with the finding, which could potentially lead to a levy of as much $1.5 billion.

Fiat shares gained 2.5% in Milan Thursday, giving the Italian American automaker a market of 20.6 billion euros. PSA closed 2.3% higher in Paris, for a of 19.4 billion euros.

A merger of Fiat Chrysler and PSA, the No. 2 for car sales in Europe, would create a regional powerhouse to challenge Volkswagen AG. Under the plan, the new company based in the Netherlands would be headed by PSA Chief Executive Officer Carlos Tavares, while Fiat Chrysler Chairman John Elkann would keep his role as chairman.

The combination would leave Tavares, who turned around PSA and the loss-making Opel brand acquired from GM, to figure out how to improve Fiat’s struggling operations in Europe. Fiat’s deep Italian roots, along with the French government’s 12% stake in PSA, may make any plans to slim down the new entity more difficult.

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