DEALTALK-Fiat Chrysler CEO seeks mega deal before stepping down – Reuters

Posted: Monday, April 13, 2015

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* FCA wants alliance to jumpstart sector consolidation

* Needs merger to fix own operational weaknesses

* Carmaker focused on partner in U.S. market, sources say

* FCA keen on GM, but the U.S. firm not interested, sources
say

By Pamela Barbaglia, Sophie Sassard and Agnieszka Flak

LONDON/MILAN, April 13 (Reuters) – Fiat Chrysler
boss Sergio Marchionne is hoping for a big deal, possibly in the
United States, to plug the carmaker’s weaknesses and cement his
legacy before stepping down in early 2019, sources familiar with
the situation said.

However, the world’s seventh-largest carmaker, which has one
of the highest debt piles in the industry, barely breaks even in
Europe and is expected to burn cash for years to revamp its
neglected Alfa Romeo brand, may struggle to find a partner.

Marchionne and Fiat’s founding Agnelli family are showing
particular interest in General Motors, several sources
say, as the U.S. market has been core to FCA for years, GM is
strong in Asia where FCA is weak and the U.S. carmaker is keen
to expand in Europe after its move to tie up with PSA failed.

But a GM spokesman said the company was focused on executing
its own strategy while one person at a U.S. bank close to the
matter said GM is “really not interested”.

“Marchionne has clearly planted the ‘for sale’ banner,” a
banker close to PSA Peugeot Citroen and General Motors
said. “He’s been sending out feelers everywhere in an
attempt to create optionalities, but so far no one is biting.”

Marchionne, who has dropped increasingly blunt hints that he
wants an alliance to jumpstart consolidation in the industry to
share capital costs and fund development of cleaner cars and
features such as self-driving, said last month a tie-up with GM
and Ford would be “technically feasible”.

The 62-year-old said nothing was on the table now, however.

An FCA spokesman declined to comment but a source outside
the company who is familiar with its strategy said: “The U.S. is
where FCA is focusing now. Marchionne is doing a lot of work on
his last deal and something will happen before 2018.”

FRAGILE FIRM

Some industry executives said Marchionne’s recent comments
may have been an attempt to create a bidding war by suggesting
greater interest than exists.

“Sergio is a great poker player: all the noise he is making
aims at hiding the fact that in reality FCA’s golden years are
nearing an end,” another banker close to the industry said.

FCA’s Milan-listed shares rose 120 percent in the last six
months but underneath is a fragile firm. Investors were inspired
by Fiat’s buyout of Chrysler, the move of its primary listing to
New York and FCA’s decision to spin-off Ferrari and distribute
the bulk of the luxury unit’s shares to FCA investors.

But FCA has an operating margin – a measure of profitability
– of only 3.4 percent, compared with 5.4 percent for its peer
average, according to Thomson Reuters data, and high debt.

FCA needs an alliance to address challenges including a gap
in Asia, an ambitious turnaround plan and an over-reliance on a
North American market that is nearing its peak. Its portfolio is
also weak on electrification and connectivity services.

It also plans to spend 48 billion euros ($52 billion) to
build new Jeeps and Maseratis and revamp Alfa Romeo. Most
industry analysts doubt that Marchionne will reach the steep 60
percent sales ramp-up to 7 million cars he envisions by 2018.
FCA sold 4.6 million vehicles last year, up 6 percent on 2013.

Still, FCA has some attractive assets: its Jeep brand has
global allure and the RAM brand offers a strong foothold in the
U.S. pickup market. Alfa Romeo, once developed, could become a
strong competitor to Volkswagen’s Audi, although the German firm
will not be keen on a full takeover, one of the people said.

TALKING TO MANY

Last year separate media reports, both denied, suggested FCA
was talking to Volkswagen and PSA about a tie-up.
PSA chief Carlos Tavares said last month it was too early to
talk about a merger, wanting to focus on his own recovery first.

Marchionne said in March he could buy or sell, adding he was
talking to many companies. While Volkswagen was not his
preferred target, he said he could imagine collaborating with
the German carmaker. Volkswagen declined to comment.

A tie-up with GM “makes a lot of sense in terms of
geographical synergies and global market share,” according to
the person at a U.S. bank close to the matter. But several
sources also said there were significant obstacles including
cutting overlaps in western Europe and the United States that
would likely fuel opposition from unions and politicians.

The two formed an alliance in 2000, cooperating on engines
and components but relations soured as Fiat’s losses mounted. In
2005, GM had to pay Fiat $2 billion not to exercise an option to
sell its auto division to the U.S. carmaker and “there’s been
bad blood since”, one person familiar with the matter said.

Fiat bid to buy GM’s European unit Opel in 2009, but lost to
a rival before GM abandoned the sale process altogether.

While it seems unlikely that GM would change its mind about
an alliance with FCA, bankers are reviewing possible merger
scenarios with Marchionne, one of few CEOs to have managed a
successful auto industry tie-up in recent years.

“The question is whether this industry will deliver an
opportunity for a deal like this,” Marchionne said. “It is my
hope that it happens before 2018 and that somebody starts this
process because once it’s started others will follow.”
($1 = 0.9185 euros)

(Additional reporting by Anjuli Davies in London, Arno Schuetze
in Frankfurt, Ben Klaymann and Joe White in Detroit and Andreas
Cremer in Berlin; Writing by Agnieszka Flak; editing by Anna
Willard)

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