French politics killed the Fiat Chrysler-Renault merger (FCAU)

Reuters

On Wednesday, a merger between Fiat Chrysler Automobiles and Renault collapsed — and collapsed swiftly.
Both companies issued terse explanations, but FCA explicitly blamed French politics.
The major challenge with the proposed deal was always going to be with the French government, which controls 15% of Renault and, with populism on the rise in Europe, couldn’t support a deal that would inevitably lead to job losses.
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The turnaround was staggeringly swift. On Wednesday, Fiat Chrysler Automobiles and Renault looked as if they were on the verge of a 50-50 merger that would have created a $35-billion global auto giant, the No. 3 automaker in the world.

But almost as soon as the deal seemed done, it collapsed. Cryptic press releases from both companies followed.

"Groupe Renault expresses its disappointment not to have the opportunity to continue to pursue the proposal of FCA," the Renault board of directors said. "We view the opportunity as timely, having compelling industrial logic and great financial merit, and which would result in a European based global auto powerhouse."

FCA was more terse: "[I]t has become clear that the political conditions in France do not currently exist for such a combination to proceed successfully."

The French government, which was always going to be the wild card in the deal, was the problem. France owns 15% of Renault, and if you believe the company’s current alliance partner/frenemy (and nonparticipant in the merger), Nissan, exercises too much influence.

An impossible situation in France

Christophe Ena/AP

The merger would have reduced France’s stake by half, so merger talks evolved to develop a special dividend for Renault as compensation for its diluted position, and there were even discussions about headquartering the joined entity not in London but rather Paris, according to Automotive News.

Underneath all this financial and organizational maneuvering were two critical factors. First, FCA chairman John Elkann wants to extract his family business, run through the Exor investment vehicle.

In this respect, he was simply carrying in the work of the late FCA CEO Sergio Marchionne, who both created FCA from the ruins of the financial crisis and consistently railed against the capital-gluttonous nature of the auto industry as he sought to reform and profitably dismember FCA’s business (the 2015 spinoff of Ferrari alone created a new company with a bigger market cap than FCA’s).

Second, the French government led by President Emmanuel Macron was keen on the merger but trapped in a worsening situation with French labor, which displayed its power through the yellow-vest protests and wasn’t going to sit quietly while the proposed FCA-Renault tie-up put Gallic jobs on the line.

When France requested more time to consider the merger, Elkann knew the inevitable collision between his Davos-y, globalist plan — carefully cultivated with Renault chairman Jean-Dominique Senard — and French unrest had scuppered the deal.

It didn’t help that Nissan at first appeared to want nothing to do with the merger, with its affairs having been complicated by the disgraced and jailed Renault-Nissan-Mitsubishi Alliance chairman Carlos Ghosn. But then Nissan apparently started to pressure the talks to preserve its technology connections with its French partner.

Globalism vs. populism

Getty / Scott Olson

It would be tough to find a more representative example of globalism on the wane and populism on the rise. Fiat and Renault are classic cases of businesses that are combined with national pride. But both companies are part of collaborations that span the globe, engineered from the need to compete in worldwide markets and to share costs by avoiding the kind of redundant expenditures the auto industry is known for.

That Ghosn, before his fall, and Marchionne-Elkann were able to hold their creations together was evidence of a shared daring, a swashbuckling belief that going it alone and relying on national goodwill to prop up industries was not just the height of stupidity, but a formula for financial disaster. Ghosn rescued Nissan and combined it with Renault against the odds; and Marchionne saved Fiat before moving on to snag Chrysler when it was on the precipice of liquidation in 2009.

The proposed merger was largely a European thing. FCA’s US operations are a cash cow, prospering on SUV and pickup sales, but the Fiat brand has been a notable failure in the US market. Renault hasn’t been a factor in the US since the early 1990s, when ironically it controlled AMC and later sold it to Chrysler. Neither company is strong in China, the world’s largest car market.

A European thing — powerful labor interests and the French state — predictably undermined the deal (although it actually seemed that Italy was enthusiastic about the merger and wanted to snare its own stake in the new Franco-Italian corporation).

Normally, one might expect merger talks to be revived, but the deal fell apart so fast — FCA basically took its ball and went home — that it looks like the era of big global auto collaborations could be ending. FCA is supposedto be taken apart, and Ghosn’s arrest in Japan on allegations of financial malfeasance has exposed the large fissures in the Renault-Nissan alliance, while in the past all that was evident were many, many small cracks.

A messy history of mergers

Associated Press

The history of mergers and alliances in the auto industry is pretty messy — FCA is one of the few major successes, but it was preceded by a train wreck when Daimler and Chrysler were conjoined — so even if FCA-Renault had gone through, it would have been anybody’s guess if the billions in cost savings could be realized.

The media latched onto the idea that the tie-up would have enabled FCA and Renault to better compete on electric vehicles and self-driving cars, but the real challenge at both companies was grappling with a flat European market and their nowheresville status in China. The writing was on the wall: SUVs and pickups in the US would provide the cash to restructure, while in Europe excess manufacturing capacity would be slashed.

France could read that writing. And while the business logic was there — Marchionne had spent much of his CEO-ship at FCA trying to merge with somebody — the political logic wasn’t. This deal might have been possible a few years ago, pre-Trump, pre-Brexit, back when France was governed in a more internationalist spirit and saw itself as an equal to Germany.

Politics in France are now, to put it mildly, tense. Jamming this deal into that situation was always going to be the biggest risk. Elkann and Senard tried to blast their way through it, and that was their only option.

They couldn’t pull it off, demonstrating in their failure that the first business battle between globalism and populism wasn’t just lost — it was lost in a hurry.

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Source: Business Insider – feedback@businessinsider.com (Matthew DeBord)