PSA denies FCA merger at risk from virus fallout

PARIS — PSA Group said it remains committed to a merger with Fiat Chrysler Automobiles after French media reports said the tie-up could be threatened by economic fallout from the coronavirus outbreak, which has sharply reduced the market capitalization of both companies.

The coronavirus fallout has called into question the financial terms of the merger, sources who are working on the transaction told the Paris-based Agence France-Presse news agency. The terms of the deal, which has been described as a merger of equals by both companies, might need to be reviewed, the French financial daily Les Echos said.

PSA and FCA signed a memorandum of understanding in December and said the merger could close in 12 to 18 months. Teams in France and Italy and working on operational details and submitting documents to relevant antitrust authorities, but they are allowed only limited contact until the closing.

The terms of the deal agreed to in December call for FCA shareholders to receive a special dividend of 5.5 billion euros ($6.1 billion). PSA shareholders would receive the automaker's 46 percent share of Faurecia, a French supplier in which PSA holds a controlling interest and which would be spun off as part of the deal. The crisis has reduced the value of Faurecia.

The question of proposed dividends is a sensitive one, as automakers seek to preserve cash to weather the crisis. In addition, if the global economy plunges into recession, automakers might need government-backed loans to cover expenses.

"If PSA or FCA appeal to the state, how could they justify asking taxpayers for billions and distributing billions to their shareholders at the same time?" Gregori Volokhine of Meeschaert Financial Services told Agence France-Presse. 

FCA said it would not comment on the reports.

PSA said in a statement that in the context of the coronavirus crisis, it would be "inappropriate to be speculating about modifications of the deal conditions. We are completely focused on protecting our employees and our company."

PSA added: "We are taking the necessary decisions to ensure group sustainability. More than ever, this merger makes sense. Our teams continue to work with the same commitment."

The merger would create the world’s fourth-largest automaker, with the aim of spreading the costs of expensive new technologies and taking advantage of greater scale.

In December, the two companies had a combined market capitalization of around 42 billion euros, with FCA having a slight edge. The special dividends were agreed to in part to equalize the values of the companies.

But movement and work restrictions put in place to combat the spread of the coronavirus have shuttered factories and showrooms for both companies. Chinese plants are starting up again, but neither PSA nor FCA has a strong presence there.

FCA's share price has fallen from around 15 euros at the end of last October, when the proposed merger was announced, to less than 7 euros on Thursday, for a market capitalization of about 10.5 billion euros.

PSA shares have fallen from around 23 euros at the end of October to around 12 euros on Thursday, for a market capitalization of 11.2 billion euros. Faurecia's market capitalization has shrunk by a third.

According to the merger agreement, there is a 500-million-euro termination fee in case of "change of board recommendation" and a 250-million-euro fee in case "the board has failed to hold a vote of shareholders before March 31 2021." For example, if PSA’s board votes against the merger, the company would have to pay FCA the fee.