PARIS/MILAN -- The boards of French automaker PSA Group and Italian-American rival Fiat Chrysler Automobiles approved a preliminary plan to merge, according to people familiar with the matter, creating a combined automaker that would rank among the world’s largest.
Under the proposal, shareholders of each company would own 50 percent of the combined entity, the people said, asking not to be named because the discussions are private. Fiat investors would receive a dividend of 5.5 billion euros ($6.1 billion) while PSA would distribute its stake in auto parts maker Faurecia, worth about 3 billion euros, ($3.3 billion) to shareholders, the people said.
The board would be made up of 11 members, with six from the PSA side, including CEO Carlos Tavares, who will lead the new company, the people said. Fiat Chairman John Elkann would assume the same role at the enlarged group, and the combined company’s corporate headquarters will be in the Netherlands where FCA is currently domiciled, they said.
Fiat Chrysler’s directors approved an agreement in principle on Wednesday, pending a formal deal, the people said. The plan authorized by PSA’s board calls for negotiations of a binding memorandum of understanding that could last several weeks, said one of the people. The two automakers envision savings and other cost efficiencies of around 3.9 billion euros ($4.4 billion), and no plant closings.
Both companies will announce the preliminary deal early Thursday before European equity markets open, the people said. PSA executives also were preparing to brief French unions on Thursday morning, they said.
Representatives for Fiat Chrysler and PSA, the maker of Peugeot and Citroen cars, declined to comment.
A merger of Fiat Chrysler and PSA, the No. 2 automaker for sales in Europe, would create a regional powerhouse to rival Volkswagen Group, with a stock-market value of about $49 billion — comparable to Japan’s Honda Motor Co. The tie-up would also bring together two automotive dynasties, the billionaire Agnelli clan in Italy and the Peugeot family of France.
The merger plan comes several months after Fiat Chrysler and PSA explored a partnership to pool investment to build light vehicles in Europe, and following the collapse in June of negotiations between Fiat and French competitor Renault SA.
“It’s not as good a partner as Renault, but any partnership is good,” said Felipe Munoz-Vieira, an analyst with Jato Dynamics in Turin. Fiat Chrysler “is not facing very good times, and it seems it’s getting worse as the time passes.”
PSA and Fiat Chrysler each lag rivals in investments in electrification and neither has a strong presence in China, but a combination could help them grow in the lucrative commercial vehicle market in Europe, Munoz said. Fiat Chrysler, which reports third-quarter earnings on Thursday, is suffering in Europe with an aging Jeep lineup and lack of SUVs under the Fiat brand, he said.
Automakers face tremendous pressure to pool resources for platform development, manufacturing and purchasing as they battle trade wars, a global slowdown and an expensive shift toward electrification and autonomous driving. In Europe, new rules on emissions present another challenge.
Against this backdrop, the pace of deals has picked up. Volkswagen in July said it will work with Ford Motor Co. on electric and self-driving car technology, while Toyota Motor Corp. is strengthening ties with partners such as Subaru Corp. and China’s BYD Co. The Indian conglomerate that owns Jaguar Land Rover is open to finding partners for the British automaker but isn’t planning on selling the embattled unit.
Declining new-vehicle sales worldwide have also added to the mix. Volkswagen Group on Wednesday lowered its outlook for vehicle deliveries this year due to a faster-than-expected decline in auto markets.
The French government is likely to play a key role in the merger because France is one of the biggest shareholders of PSA, whose brands also include Opel and Vauxhall. The French finance ministry has signaled support for a deal, while warning it would scrutinize the impact on jobs and the governance structure of the new company, as well as its commitment to build a European battery maker.
PSA has been floated as a logical merger partner with Fiat because of their complementary product and geographic fit, and the two sides discussed partnership possibilities this year. However, the Italian-American automaker instead pursued a deal with Renault.
Those talks were called off in June when Elkann, who also heads Fiat Chrysler’s largest shareholder, Exor, walked away amid opposition from the French government and a lack of support from Renault’s Japanese alliance partner Nissan Motor Co.
Tavares has sought to re-establish Peugeot’s foothold in the U.S., a market it exited in 1991. He set plans earlier this year for a return, with shipments starting from Europe or China in 2026.
FCA has sought to secure its future with a larger partner for several years, dating back to late CEO Sergio Marchionne’s failed courtship of General Motors. After being rebuffed by GM in 2015, rumors of talks with other automakers have swirled with varying intensity.
