PSA And FCA Merger Become The World'S Fourth Largest Car Enterprises Dongfeng Why Reduce PSA Stock?

In December 18th, Fiat Chrysler Corporation (hereinafter referred to as FCA) announced that the board of directors of the Peugeot Citroen group (hereinafter referred to as PSA) had adopted the merger plan of both sides, and the two sides had signed a binding merger agreement.

The announcement shows that the two sides' business will be merged in 50:50 ratio and will create the fourth largest auto group after Volkswagen, TOYOTA and Renault Nissan MITSUBISHI alliance.

The two sides will form a new auto group, including Fiat, jeep, Dodge, Rahm, Chrysler, Alfa Romeo, Martha Lahti, Peugeot, Citroen, DS, Opel and Waxman hall, including luxury cars, luxury cars, mainstream passenger cars to SUV, card cars and light commercial vehicles.

In addition, the board of directors of the new group is composed of 11 members. John Erkan, the current chairman of the board of directors of FCA, is the chairman of the new group. Tang Weishi, chairman of the PSA Management Committee, will serve as the CEO of the new group, with an initial term of five years.

It is worth noting that in order to facilitate the smooth progress of the merger plan, Dongfeng Group, one of the largest shareholders of PSA, which is one of the largest shareholders of the French government and Peugeot family, has agreed to sell 30 million 700 thousand shares before the end of the transaction (equivalent to 3% of PSA shares, which will be written off after the sale), and all the holdings will be purchased by PSA.

Dongfeng Group's remaining shareholding for PSA will be locked until the transaction is completed, thus having ownership of the new group 4.5%.

It is understood that the proposed merger is expected to be completed within 12 to 15 months. The merger should meet the customary closing conditions, including the approval of shareholders of two companies at their provisional shareholders' meetings, and the satisfaction of antitrust laws and other regulatory requirements.

With the introduction of the merger agreement, how can the two huge and complex international automobile giants integrate their resource advantages? What will be the impact of the merger on the global automotive market? Why does Dongfeng Group reduce PSA shares? Can Dongfeng Group win the board seat of the new group? Will the merger of PSA and FCA affect the development of joint ventures in China? This series of problems has also become the focus of attention in the industry.

Merger accelerated electrification transformation

FCA also disclosed specific cooperation plans and development goals in the announcement.

Before the transaction is completed, FCA will allocate a special dividend of 5 billion 500 million euros to its shareholders and its shares in Comau. In addition, in order to share the synergies and benefits arising from the merger, the Peugeot will allocate 46% of its shares to its shareholders before the transaction is completed.

In addition, the company intends to allocate 1 billion 100 million euro common stock dividends related to fiscal year 2019 in 2020 (subject to approval by the board and shareholders of the companies). At the end of the transaction, PSA shareholders will get 1.742 shares of the new group for holding 1 shares of PSA, while FCA shareholders will get 1 shares of the new group for holding 1 shares of FCA.

In the eyes of many people in the industry, the merger of the two sides will help to cope with the persistent downturn in the global auto market and promote the transformation of electric industry more quickly.

"The global car market continues to decline, which is constantly eroding the gross profit and profit of car companies, and at the same time, the investment in technology such as autopilot has increased the pressure of performance." In the view of a senior analyst in the automotive industry, "many car companies are trying to control costs to avoid falling profits."

At the same time, in the face of increasingly stringent emission standards in the world, the transformation to electrification is the general trend.

But in the field of electric cars, automatic driving, sharing trips and so on, we need to invest hundreds of billions of dollars in the field. High R & D expenses and investment are also huge challenges that car companies must face in the process of transformation.

In order to cope with the great challenges brought about by the transformation process, cooperation and alliances are a better strategic choice for most car companies. Through alliances, we can share high development costs and risk sharing.

Take the merger of FCA and PSA as an example, only a simple merger, without considering any factory closures, can save 3 billion 700 million euros a year. More importantly, the new group will continue to make efforts in the field of electrified powertrain, automated driving and digital interconnection to meet the sustainable mobile travel era in the future.

"According to the data collected by each company in 2018, the new group will have greater regional balance. 46% of its revenue comes from Europe and 43% of its revenue comes from North America. The merger will create opportunities for the new group to reshape other regional strategies. " FCA pointed out in the announcement.

In addition, FCA said, "from the first year, the synergy effect will generate positive net cash flow, which will achieve about 80% synergy in fourth years. The total one-time cost of achieving synergy is estimated at 2 billion 800 million euros. These synergies will enable merged enterprises to invest in the technology and services of future travel in large scale, while meeting the challenging global carbon dioxide regulatory requirements. " But in the US analyst Juergen Pieper, the deal will not solve all the shortcomings of the two carmakers. "The merged enterprises will still lack" very good high-end brands "and" good position in China ".

Dongfeng holdings of PSA shares

With the promotion of the merger plan of PSA and FCA, the reason why Dongfeng Group, one of the largest shareholders of PSA, has reduced its PSA stake is still complicated and confusing.

Public information shows that in 2014, through capital raising and placement shares, Dongfeng Group invested 800 million euros in the price of 7.5 euros per share to acquire PSA12.2% shares, and had 19.5% of the voting rights. After entering PSA, Dongfeng group gained 2 seats in the PSA board of supervisors. The two sides agreed to cooperate in the fields of technology, R & D, manufacturing and overseas markets.

According to normal estimates, Dongfeng Group will own about 6% of the new group after PSA and FCA have half shareholdings. After the reduction, the shareholding ratio of Dongfeng Group in the new group will fall to 4.5%.

Wang Chao, director of communications in PSA and China's Southeast Asian region, told reporters when asked whether he could get the seats of the new group board after the reduction. "It is not yet clear whether there is a board seat in Dongfeng, but it can be determined that EXOR N. V., Peugeot family and BpiFrance have seats in the board of the new group."

A series of uncertainties also means that the east wind may be out of the way, and can not become an important participant in the upcoming fourth major global automobile groups.

However, why does Dongfeng Group reduce its stake in PSA? Earlier, it was pointed out that the US Foreign Investment Commission (CFIUS) conducted a rigorous review of foreign acquirers' transactions to investigate potential national security risks, and especially strengthened the supervision of transactions involving Chinese entities. In view of this, Dongfeng Group's reduction of PSA helps to merge PSA and FCA with the approval of US regulators.

"The US Foreign Investment Commission is specifically examining foreign investors. If there is no mandatory requirement for shareholding ratio, then this is not the root cause of Dongfeng's PSA equity reduction." In December 18th, an automotive industry expert told the business reporter in twenty-first Century that "capital demand for Dongfeng's own capital chain and new development projects may be a factor in selling equity."

According to the valuation data of the global automobile manufacturers in the past 5 years, Peugeot Citroen shares ranked third, second only to Geely and Fiat Chrysler. Before buying shares, Dongfeng Group's PSA stake has been worth about 2 billion 200 million euros, nearly three times as long as it bought.

At the latest closing price, the Dongfeng Group's 30 million 700 thousand shares are worth 679 million euros.

"This is in line with business logic. At present, the overall operation of Dongfeng is not good. The two major sectors, including Dongfeng independence and Shenlong company, are losing money. Although the PSA shares are making money, they do not achieve the goal that Dongfeng wants to achieve when they first joined the stock market. At the same time, they can also talk about a good price." The experts pointed out.

In this regard, Dongfeng related responsible person said, "this partial reduction will help DFG (Dongfeng Group) to lock in the existing investment income and increase the certainty of earnings. DFG is in good operation and its cash flow is stable. Part of the reduction plan has nothing to do with DFG cash flow. DFG will retain most of its holdings of PSA before the completion of the partial reduction and the completion of the merger transaction, and will not have any impact on DFG's seat in the PSA supervisory board. "

In addition, whether the merger of PSA and FCA and the reduction of Dongfeng will affect its joint venture in China, the relevant official of Shenlong company told reporters that Shenlong has not been affected, or is pushing forward the "Yuan" plan of China's revival in accordance with the plan.