The Fiat Chrysler and Peugeot Planned Merger: An Imperfect Union at a Tough Time

Fiat Chrysler and PSA of France announced on Thursday that they planned to merge, a move prompted by intense pressures transforming the automotive industry. The combined operation would produce slightly more cars than General Motors.

The companies have similar weaknesses, including a reliance on a slowing European car market and few sales in China, the world’s largest new-car market. But the industry is facing broad tensions as new technologies demand deep investments, global sales are flattening and consumers reconsider the appeal of car ownership.

In that context, Fiat and PSA, the maker of Peugeot and Citroën cars, are imperfect partners, but perhaps had no better prospects. And the combined company would certainly have size: With annual sales of 8.7 million vehicles, it would be the biggest automaker behind the Renault-Nissan alliance, Volkswagen and Toyota.

In Europe, Fiat and PSA, with its Peugeot and Citroën brands, will surpass Volkswagen to become market leaders. They also have a strong lineup of sport utility vehicles, which are increasingly popular with European buyers.

Over all, though, the European market has been in a long decline.

“Both groups would control Europe’s fastest growing segment and the source of profits,” said Felipe Munoz, senior analyst at Jato Dynamics. “However,” he said in an email, “both companies lag behind rivals in terms of electrification.”

The announcement came after a round of board meetings on Wednesday that endorsed what the companies described as intensive discussions among their senior managers. The automakers described the transaction as a way to share the enormous cost of an industrywide transition to electric and autonomous vehicles.

Both boards unanimously approved the general terms of the agreement and instructed their teams to come up with a memorandum of understanding “in the coming weeks.”

Fiat Chrysler’s chief executive, Mike Manley, said the companies had “plenty of work to do” before reaching a formal agreement but declared that a merger “is very compelling” for both companies.

“A merger would bring together two strong and complementary businesses to produce a genuine, global mobility leader,” Mr. Manley said on a conference call to discuss Fiat Chrysler’s third-quarter earnings. “If we are able to finalize this transaction, there is significant potential value to be released.”

Carlos Tavares, the chief of PSA, is to be the chief executive of the new company. Mr. Tavares, described by people who have met him as charming but tough, has already expanded PSA’s presence in Europe by acquiring Opel from G.M. in 2017.

John Elkann, the chairman of Fiat Chrysler, is to be the chairman of the new company. Mr. Elkann is a scion of Italy’s powerful Agnelli family, which has long controlled Fiat.

Mr. Manley did not discuss what his role would be in a merged company. He could stay on to run its North American operations, Fiat Chrysler’s main source of profit.

He rose to prominence in the company by heading its Jeep brand during a period of rapid expansion and was named chief executive in July 2018 when his predecessor, Sergio Marchionne, died after complications from shoulder surgery.

The merger will be accomplished by exchanging shares, with each company contributing 50 percent of the new entity. Shareholders of Fiat Chrysler will receive a special dividend of 5.5 billion euros. PSA shareholders will receive a special dividend of about €3 billion from the sale of the company’s stake in Faurecia, an auto-parts maker.

Investors in the two companies reacted differently on Thursday as they sorted through the deal’s details. Fiat Chrysler shares jumped by about 9 percent in Italian trading, while PSA’s fell by more than 11 percent.

The parent company will be registered in the Netherlands, which offers some preferential tax laws. Fiat Chrysler and PSA will each nominate five members to the new company’s board. The chief executive, Mr. Tavares, will hold the 11th seat.

An attempt by Fiat Chrysler to merge with Renault earlier this year foundered in part because of objections from the French government. The French finance minister, Bruno Le Maire, said Thursday that he “favorably welcomed” the deal between Fiat Chrysler and PSA.

But the French government, long an influential shareholder in PSA, said it would be “vigilant” about ensuring that the group retained a significant industrial presence in France, as well as sway over decision making. The government will also seek a commitment from the merged company to be involved in a European effort to create an industry for electric-car batteries, Mr. Le Maire said.

The companies said Thursday that they could save €3.7 billion a year by sharing the cost of new technologies. They said they could do so without closing any factories.

French unions had been concerned that Fiat’s effort to merge with Renault could result in plant closings, and had pressured the government to press Fiat to preserve jobs and to select plants outside France for any future consolidation. The demands were among several that made Fiat wary of French government intervention, helping to scuttle the deal.

The government, which will remain a shareholder, has struck a more conciliatory tone toward Fiat with the current merger, although it is still expected to try to prevent any layoffs in France.

Most union leaders at PSA welcomed the merger, saying it would let the automaker compete with giants like Volkswagen and Toyota and possibly create more jobs after a decade of cuts. PSA shed more than 3,200 employees in France last year and has a French work force of 64,560 compared with 100,000 a decade ago.

Only the General Confederation of Labor, the often confrontational union known by the initials C.G.T., expressed mistrust. “We are concerned that this merger will result in further losses,” said Jérôme Boussard, a C.G.T. representative at the automaker.

Fiat Chrysler’s earnings report showed some of the challenges facing it as an independent company. The automaker lost €179 million in the quarter, mainly because it took a noncash charge of €1.4 billion. The charge stems from the loss of value of development work on components for a small car and a range of upscale models that the company had to scrap while refocusing its spending on electric vehicles.

Not including the charge, the company made €1.3 billion in pretax profit, a decline of 6 percent from a year ago.

While it continues to make substantial profits on Jeeps and Ram trucks in North America, Fiat Chrysler’s sales fell in all regions of the world in the third quarter, including a steep decline in China. It is working to come up with new business plans for its struggling luxury brands, Alfa Romeo and Maserati, Mr. Manley said. The company plans to drop some slow-selling Alfa models and pull the brand out of markets where it has struggled to make money.

For Fiat Chrysler, the deal will help compliance with environmental regulations. Combining with PSA will reduce the average carbon-dioxide emissions of its vehicles and help it avoid fines in the European Union that could come to €3.5 billion, according to Tom Narayan, an analyst at Royal Bank of Canada. PSA is farther along than Fiat in cutting carbon-dioxide emissions to meet the mandatory targets, which are part of Europe’s plan to address climate change.

Amie Tsang contributed reporting.