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Here's Why FCAU Withdrew Its Proposal to Merge with Renault

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The May 27 proposal to merge Fiat Chrysler Automobiles (FCAU - Free Report) with Renault was just too good to be true. Not only would the $35 billion deal seen the emergence of the third largest automaker in the world with annual vehicle sales of 8.7 million units, but it would also have allowed the two to manage 5 billion euros in cost synergies (including a billion for Renault’s Japanese partner Nissan) by saving purchasing cost and splitting electric and autonomous car R&D.

With minimal product overlap, FCAU’s popular Jeep and Ram brands also complement perfectly Renault’s leadership in autonomous and electrified vehicles (where FCAU needs a much stronger footing).

But there were challenges right at the outset that proved to be too big to overcome.

The first was with respect to the French government, which has a 15% ownership in Renault.

The second was Renault’s (15% owned by Nissan) alliance with Nissan (40%+ owned by Renault) and Mitsubishi (controlling share owned by Nissan). That’s how complicated it is.

The Problem with the French Government-

The government started out wanting that there should be no job losses in the country, that no French plant should be shut down and that a dividend is paid to Renault shareholders as part of the deal. Later, it started specifying things like the location of the merged company’s headquarters as well as board representation. Plus of course partner Nissan’s active support.

To be fair, some Renault shareholders also had reservations. Paris-based activist investment manager CIAM for instance sent a letter to Renault’s board, saying that the deal significantly undervalued Renault and that its shareholders deserved the 2.5 billion-euro ($2.8 billion) dividend promised to FCAU shareholders.

The Problem with Nissan-

 The company is not averse to the deal, as long as it is able to retain some of its EV IP. It would probably also like to raise its stake in Renault so it can have more of a say in the alliance.

The Result

When the proposal was put to vote, all the French directors were in favor. Nissan abstained, likely because of its unsolved issues with Renault. The government voted against the deal because it wanted more time to fly to Japan and convince Nissan’s top brass that it was a good deal.

At about this time, FCAU pulled out, likely because Nissan (and its leadership in EV) was probably an important consideration in the first place. So if it decided to hang on to its IP, the deal didn’t make sense.

So unfortunately, it was left with making a statement to the public:

"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."

"FCA will continue to deliver on its commitments through the implementation of its independent strategy."



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