GM seeking advice in wake of FCA merger push

BY HAITHAM RAZAGUI | 22nd Jun 2015


DESPITE a public rebuttal from General Motors CEO Mary Barra earlier this month, the pursuit of a merger with GM by Fiat Chrysler Automobiles president and CEO Sergio Marchionne appears to be gaining momentum.

A rear-guard action is also reportedly being fought through a plan B strategy of engaging with other car-makers, such as struggling French conglomerate PSA Peugeot Citroen, or even a technology company like Google or Apple if all else fails.

But reports by Reuters that GM has sought advice from investment banks Goldman Sachs and Morgan Stanley are thought to suggest the Detroit giant is taking Mr Marchionne’s campaign seriously.

A notorious dealmaker, Mr Marchionne is reportedly attempting to force GM to the negotiating table by lobbying GM shareholders under the advice of Swiss bank UBS – where he previously held a position on the board – and has not stopped working on his plans for a GM-FCA merger.

If he fails to get first-preference GM to the altar, the potential list of alternative suitors from the automotive sector includes PSA Peugeot Citroen and Volkswagen Group, while existing arrangements with Japanese brands Suzuki and Mazda could also be expanded.

Problems facing deals with the Europeans are that PSA is not profitable, highly exposed to the European market and lacks GM’s scale, while Volkswagen Group has a track record of demanding full control of companies it acquires, which would not sit well with the Agnelli family who hold around 30 per cent of FCA.

Ford has publicly distanced itself from an FCA merger, while Toyota North America CEO Jim Lentz went on record saying he had not been approached, doubted his Japanese colleagues had been and that in any case, the company would not be interested.

The Wall Street Journal recently reported that before GM’s annual general meeting on June 9, Mr Marchionne had asked some institutional investors and hedge funds to raise the consolidation proposal.

As Ms Barra entered the GM AGM, she told media the board had received a letter from Mr Marchionne about the proposed cooperation and dismissed it.

Ms Barra said GM expects to build 10 million vehicles this year and does not need to merge with FCA for economies of scale reasons, while it is already working with Ford on transmissions and Honda on hydrogen fuel-cell technology.

However, she said the company is open to other technology sharing opportunities.

With a market capitalisation of $US20 billion ($A25.7b) – about a third of GM’s $US57b – and heavy debts of around $US9.8b, Mr Marchionne’s merger campaign has been described to Reuters as “like a dog barking at an elephant” by a senior investment banker.

However Mr Marchionne has a reputation, having made GM pay $US1.99b to Fiat in order to sever the Italian-American alliance in 2005. When Chrysler went bankrupt in 2009, Fiat acquired 20 per cent of the company in a no-cash transaction, then used booming Chrysler profits to both prop up Fiat and buy the remaining Chrysler shares until the acquisition was completed in January last year.

FCA had planned to spin off Ferrari as a separate entity in the first half of this year and sell 10 per cent of the newly formed company on public stock exchanged, but this has now been delayed until October.

And while Reuters reports that any merger with GM would not include Ferrari because the Agnelli family wants to retain control of the flagship brand, analysts say FCA needs to retain its current equity value to give it a stronger negotiating position with GM.

Reuters also reports that a feared automotive downturn could bring down company valuations, meaning it is “now or never” for Mr Marchionne, according to a banker who said industry valuations had peaked.

A hostile takeover bid is also not out of the question, with Bloomberg quoting Singapore-based analyst Max Warburton describing such action as “beyond ambitious”.

“But stranger things have happened, especially in bubbly equity markets,” he said.

That said, Forbes also points out that GM’s $US34.2b deferred tax asset, retained during its 2009 Chapter 11 bankruptcy and subsequent government bailout, could be forfeited if GM changes ownership – and it counts for the vast majority of its first quarter shareholder equity of $US36.3bn.

That would only happen if FCA bought GM, not the other way around, and Mr Marchionne faces a tough time convincing major GM investor Brock Capital Group – which manages shares for the United Auto Workers Union – due to the potential job losses associated with consolidation.

In addition to labour issues on both sides of the Atlantic, a merger between two of the Detroit big three would also encounter antitrust hurdles in the United States.

For some time Mr Marchionne has insisted that the global automotive industry must consolidate in order to share the cost of developing ever safer, more fuel-efficient vehicles to meet tightening market and legislative demands – while buyers are unwilling to pay higher prices for cars.

He believes a merger with a giant like GM would yield annual cost savings of $US6b by reducing duplication in research and development and making more efficient use of existing facilities.

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