Peugeot Chief Sees Fiat Deal as ‘Virtual Takeover’ of Renault

(Bloomberg) -- Fiat Chrysler Automobiles NV’s plan to merge with Renault SA drew criticism from the French carmaker left on its own, Groupe PSA, that contrasts with backing for the deal from investors and governments.

In a memo sent to top officials of the Peugeot owner on Monday, CEO Carlos Tavares highlighted risks to the proposal. Renault was chosen mainly because its value was depressed by the troubled alliance with Nissan Motor Co. following the Carlos Ghosn affair, according to the memo. Paris-based PSA held talks with Fiat earlier this year on potential collaboration.

“The transaction proposed by Fiat Chrysler therefore seems particularly opportunistic, largely to its benefit,” the note said, while acknowledging potential for savings. “For Renault, this may be an asset in discussions with Nissan, but it could also weaken the alliance or even lead to an unwinding.”

A spokesman for PSA declined to comment.

For Tavares, Fiat’s decision to pair up with Renault represents a missed opportunity. Since arriving in 2014, the 60-year-old executive -- a former protege of Ghosn at Renault -- has turned around a struggling PSA by focusing relentlessly on efficiency and scale. He held talks with Fiat earlier this year to build a new “super platform” before the Italian-American company slipped into the arms of Renault.

Now Tavares may be left with options such as a potential tie-up with Jaguar Land Rover. More than three-quarters of PSA’s revenue comes from Europe, where automakers face a consumer slowdown and a squeeze on profit margins from stricter emission regulations.

At the Geneva car show in March, it looked like Fiat and PSA would pair off. Tavares and his counterpart at Fiat, Mike Manley, spoke publicly about the desire to participate in consolidation.

But Fiat Chairman John Elkann wasn’t convinced. A deal with PSA would rely on disruptive and politically unpalatable job cuts, while Renault, based in the Paris suburb of Boulogne-Billancourt, offered a more-advanced program for electric cars and greater access to Asia through Nissan.

Renault’s share price has hovered near five-year lows, according to the memo, which -- echoing some analysts -- contends the carmaker’s market value is negative after stripping out its 43% Nissan stake and banking business RCI. “Renault’s current valuation largely explains Fiat’s interest in a merger,” it said, calling the deal a “virtual takeover of Renault by Fiat.”

Relations between Nissan and Renault have been strained since the arrest of alliance leader Ghosn in November. Recently, Nissan pushed back against a Renault plan to join together under a 50-50 holding company structure. Should the alliance break up, Renault may end up unwinding its Nissan stake “under particularly deteriorated conditions,” the memo said.

The Franco-Italian tie-up bears management and governance risks, along with the possibility of antitrust remedies, according to the note. The transaction will "open a period of fragility for the various actors," it concluded.

--With assistance from Tara Patel.

To contact the reporter on this story: Ania Nussbaum in Paris at anussbaum5@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Jonathan Roeder

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