Fiat PSA merger to generate €1.5bn in procurement savings

18 December 2019

Automakers Fiat Chrysler (FCA) and PSA Group, owner of Peugeot and Vauxhall, have announced a merger which the firms said could deliver €1.5bn in procurement savings.

The firms said the merger would generate a total of €3.7bn in annual run-rate synergies and around 40% of this would come from purchasing, mainly around “scale and best price alignment”.

The combined company would be able to use its scale to “develop innovative mobility solutions and cutting edge technologies in new energy vehicles, autonomous driving, and connectivity”.

The merger would see the creation of the fourth-largest OEM by volume at 8.7m units and third-largest by revenue at €170bn.

Efficiencies would be gained through combined investments in vehicle platforms, engines and technology, and increased scale would enable the business to “enhance its purchasing performance”, the automakers said. 

“Technology, product, and platform-related savings are expected to account for approximately 40% of the total €3.7bn in annual run-rate synergies while purchasing –benefiting principally from scale and best price alignment – will represent a further estimated 40% of the synergies. 

“Other areas, including marketing, IT, administrative and logistics, will account for the remaining 20%.” 

The firms added there would be no plant closures as a result of the merger. 

A one-time cost of €2.8bn is required to achieve the synergies, but the firms estimated the synergies would be net cash flow positive from year one, with 80% realised within four years. 

“Those synergies will enable the combined business to invest significantly in the technologies and services that will shape mobility in the future while meeting the challenging global CO2 regulatory requirements,” the firms said.

On a conference call, Carlos Tavares, CEO at PSA, said the merger was a “huge opportunity to take a stronger position in the auto industry”.

Mike Manley, CEO of FCA, added: “This is a union of two companies with incredible brands and a skilled and dedicated workforce. Both have faced the toughest of times and have emerged as agile, smart, formidable competitors.”

The merger is subject to shareholder and regulatory approval.

Earlier this year, a proposed merger between FCA and Renault collapsed following an intervention from the French government. The merger would have created the third-largest carmaker, behind Volkswagen and Toyota.

At the time, FCA said: “FCA remains firmly convinced of the compelling, transformational rationale of a proposal that has been widely appreciated since it was submitted, the structure and terms of which were carefully balanced to deliver substantial benefits to all parties. 

“However it has become clear that the political conditions in France do not currently exist for such a combination to proceed successfully.”

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