Fiat Chrysler and Peugeot owner

announce $48 billion merger

By Charles Riley and Chris Isidore, CNN Business

Updated 1354 GMT (2154 HKT) October 31, 2019

London (CNN Business) — Fiat Chrysler and Peugeot owner PSA Group have announced the terms of a $48 billion
merger that would create the world's third-largest automaker and help spread the huge cost of developing
electric and autonomous vehicles.

Shareholders of each automaker would own 50% of the combined operation, the companies said in a joint
statement on Thursday. A binding agreement could be finalized within weeks, the statement said. Fiat Chrysler
shareholders also would get a special one time dividend worth €5.5 billion ($6.1 billion) as part of the deal.

The combined company would be based in the Netherlands, which is the current headquarters of Fiat Chrysler,
although it will keep a head oSce for its North American operations near Detroit. John Elkann, the US-born
scion of the Italian family that founded Fiat, would be chairman of the combined company, while PSA chief
executive Carlos Tavares would be CEO.

The combined company would have roughly 410,000 employees and annual revenues of $190 billion. Fiat
Chrysler (FCAU) and PSA (PUGOY) sold a combined 8.7 million vehicles last year, just ahead of General Motors
(GM), which sold 8.3 million, and not far behind Volkswagen (VLKAF) and Toyota (TM), which each sold over 10
million.

The merger comes amid a global auto sales slowdown, which could worsen as economies around the world
slow or even fall into recession. At the same time, carmakers are scrambling to invest in the electric and hybrid
technologies needed to meet strict new emissions targets in China and Europe. The autonomous vehicles of
the future also present a threat to traditional industry business models. The huge amount of capital needed to
meet these new challenges has forced some automakers to find partners and turned others into acquisition
targets.

Jessica Caldwell, Edmunds' executive director of industry analysis, said the planned merger of Fiat Chrysler and
France's PSA "isn't really about product or expanding to new markets." Rather, it's about funding research into
the vehicles of the future.

"The electrified, autonomous future everyone is waiting for just isn't feasible without automakers merging and
forming strategic alliances to share research and development costs," she said. "This is a smart move by both
Fiat Chrysler and PSA to ensure their companies continue to be viable and relevant as the industry evolves."

The carmaker with the most urgent need to combine in this case was PSA, which has fallen behind on
developing clean cars. Electric vehicles account for less than 0.3% of its overall sales, and it had to pay Tesla
(TSLA) for credits needed to comply with EU emissions standards. Fiat Chrysler has also trailed larger rivals in
developing electric vehicles.

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together to develop electric and self-driving vehicles, while German carmakers BMW (BMWYY) and Daimler
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General Motors' (GM) self-driving car unit.

A history of mergers
It's not the first time that PSA has used a merger to bulk up. In 2017 it paid $2.3 billion to buy GM's European
business, adding the Opel and Vauxhall brands as GM exited the continent. While GM lost about $22.4 billion in
Europe over the 17 years before that deal, Opel and Vauxhall are now profitable for PSA.

Teaming up during times of adversity is also a familiar strategy for Fiat, which started the purchase of US rival
Chrysler out of bankruptcy a decade ago. It completed the merger five years later. But even following that deal,
Fiat Chrysler was still significantly smaller than many rivals, putting it at a disadvantage in purchasing muscle as
well as spreading out the cost of research and development.

Sergio Marchionne, the late CEO who brought Fiat and Chrysler together, spoke publicly about his desire for a
deal with GM. He also expressed interest in a combination with a tech company such as Google (GOOG) or
Apple (AAPL).

Earlier this year, Fiat Chrysler made a merger proposal to another French automaker, Renault, a company of
comparable size to PSA. But it withdrew the oier, saying that "it has become clear that the political conditions
in France do not currently exist for such a combination to proceed successfully."

The French government owns 15% of Renault and is its

largest shareholder; it also owns 12.2% of PSA. France has
said it would approve the Renault deal only if there were
protections for French jobs and factories.

Related Article: Fiat Chrysler lost Renault. It
needs to find another partner fast
New challenges
Fiat Chrysler also reported third quarter financial results
Thursday. Despite slowing global sales, it posted a record
third quarter operating profit for the company that topped
Wall Street forecasts, and said it is on pace to hit its full-
year profit target. But a restructuring charge related to
dropping some segments of its vehicle lineup in Europe
and changes at Alfa Roeo resulted in a net loss for the
quarter.

Still, between the earnings outlook, the operating profit and the news about the merger, shares of Fiat Chrysler
(FCAU) were 3% higher in premarket trading Thursday in the US. Shares of Fiat Chrysler had already risen 14%
since the start of the week through Wednesday's close on reports of a looming deal. But PSA, which eiectively
is paying a premium to secure the merger with Fiat Chrysler, had its shares tumble 13% in Paris trading on
Thursday.

Fiat Chrysler and PSA face huge challenges even if their merger is completed.

Both have struggled to break into China, the world's largest market for new cars. Automakers have sold 10%
fewer cars there so far in 2019, but the joint ventures of Fiat Chrysler and PSA have been hit especially hard.
Sales dropped by a third for Fiat Chrysler in the first half of the year, and more than 50% for PSA.

PSA also has no presence in the United States, the world's second largest car market. Miniscule US sales of
Fiat branded cars show the diSculty in bringing mass market European brands, as opposed to luxury brands,
to US showrooms.
"Both Fiat Chrysler and PSA have a lot of quirky city cars that couldn't be further from what US car shoppers
want right now," said Caldwell.

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