Carlos Tavares has earned a reputation as one of the industry’s best leaders since being named PSA’s CEO six years ago.

Just months after merger talks with Renault collapsed, Fiat Chrysler Automobiles is in the midst of negotiating a similar deal with another French automaker, Renault’s archrival PSA, FCA confirmed Wednesday.

The two companies have had ties for a number of years and, should they pair up, would create a global automaker with a combined value of around $50 billon. They also could help fill the gaps in each other’s line-up, said sources familiar with the negotiations. Among other things, the French carmaker could speed up its slow return to the U.S. market after a quarter-century absence.

But there could be a potential obstacle in the way of a deal. The French government currently owns a stake in PSA, Europe’s second-largest automaker, much as it does in Renault. It was the government’s effort to delay negotiations between Fiat Chrysler and Renault that led to the collapse of that merger proposal last June.

(FCA Scuttles Deal With Renault, Blames French Government)

“Following recent reports on a possible business combination between Groupe PSA and FCA Group, Fiat Chrysler Automobiles N.V. (“FCA”, NYSE: FCAU /MTA: FCA), confirms there are ongoing discussions aimed at creating one of the world‘s leading mobility Groups. FCA has nothing further to add at this time,” the Italian-American automaker said in a statement issued from its corporate headquarters in London overnight.

Fiat Chairman John Elkann is expected to retain his role in a merged company.

FCA emerged out of the 2010 bankruptcy of the smallest of Detroit’s Big Three automakers, Fiat stepping in to help ensure the Obama Administration would help bail out Chrysler, as it was also doing for General Motors. The two officially merged in 2014, but even before completing that deal, former Fiat Chrysler CEO Sergio Marchionne began searching for yet another partner.

The executive, who passed away unexpectedly in July 2018, was rebuffed by a number of possible partners, including GM and Volkswagen. But Marchionne’s hand-picked successor, Michael Manley, soon pushed forward with talks with Renault. The deal appeared to be moving forward quickly, at least until Renault’s own Japanese affiliate, Nissan, began raising objections. In turn, the French government pushed to delay negotiations, prompting Manley to scrub the talks.

But FCA officials made it clear they remained open to other options. And for good reason, according to industry observers. The carmaker has been a laggard in terms of developing two key technologies considered critical to the future of the auto industry: electrified and autonomous vehicles. The billions required to bring those technologies to market would stretch FCA’s thin budget, they warn.

For its part, PSA has already been working on both those technologies. More significantly, since the arrival of CEO Carlos Tavares – Renault’s former second-in-command – six years ago, the French company’s fortunes have improved significantly. It demonstrated that turnaround with the recent acquisition of Opel-Vauxhall, long the money-losing subsidiary of GM. Within a year the German operation was in the black for the first time in two decades.

FCA came within a hair’s breadth of pulling off a merger with Renault earlier this year. That deal collapsed, in large part, due to complaints raised by Hiroto Saikawa, the soon-to-retire CEO of Renault’s alliance partner, Nissan.

Exactly how a deal between FCA and PSA would be structured is uncertain. The deal Fiat Chrysler was negotiating with Renault would have been positioned as a merger of equals and that could be the case this time, as well, with a share exchange eliminating the need to raise any capital, according to a report by the Wall Street Journal. That could make sense since they have near equal stock valuations: $22.5 billion for PSA and $22.3 billion for FCA – at least before the talks were disclosed. Fiat Chrysler shares alone have surged sharply during the past 24 hours.

Yet another option that has been discussed would see the French company effectively acquire Fiat Chrysler.

Senior executives from FCA are currently in Europe, has confirmed. That would fit into a report by the Bloomberg News which said the PSA board is holding an extraordinary meeting at the company’s headquarters in Paris today. The FCA board will hold a similar meeting.

A combination of the two companies wouldn’t match the global size or reach of what might have been created were FCA to partner with Renault and then meld into the Renault-Nissan-Mitsubishi Alliance. That three-way relationship already is one of the largest automotive groups in the world in terms of vehicle sales. But a PSA-FCA merger would nonetheless create a major new powerhouse with a valuation roughly akin to that of Honda.

(A New Partner for Fiat Chrysler? Peugeot Says Maybe)

Who would manage such an enterprise is uncertain, but several sources indicate the proposed management team would echo what was on tap with the FCA-Renault proposal. FCA Chairman John Elkann – heir to Fiat’s founding Agnelli family – would retain his position, while PSA’s Tavares would remain CEO of the new company. Where current Fiat Chrysler CEO Manley might fit in is unclear, though he is not expected to leave.

One question an FCA-PSA merger would raise is whether the French company would accelerate its slow return to the U.S. market.

FCA and PSA have worked together on a number of projects in recent years and, prior to news of the Fiat Chrysler-Renault discussions, there had been some speculation they might try to merge.

Such a deal now could help both address weaknesses both in their brand and geographic portfolios. Among other things, Peugeot would like to get back into the U.S. market, possibly quicker than the decade-long revival plan it currently is following.

But both also share some weaknesses, particularly in China, the world’s largest automotive market. It is unclear how their partnership could help them solve that challenge, at least in the short-term, according to analysts including Michael Dunne, an Asia auto specialist from ZoZo Go.

Any deal that FCA and PSA come up with will have to clear a number of immediate hurdles. The French government holds a 12.23% stake in the French automaker, though it has not been as active a participant in PSA’s management decisions as it has with Renault. That reflects the muscle Tavares has developed since taking over what was a company close to bankruptcy in 2013. The PSA Group, which includes brands such as Peugeot and Citroen, generated a record operating profit of 8.7% for the first half of this year, rivaling the numbers of many luxury automakers.

And he proved his mettle, a ranking PSA executive told, with the almost instant turnaround at Opel which was in the black within a year after its 2017 acquisition – two years ahead of Tavares’ stated goal.

Even if the French government, as well as the original Peugeot family and China’s Dongfeng, another major shareholder, sign on for a merger with FCA, that doesn’t mean it will happen, cautioned that PSA insider.

Tavares, he said, “would pull out in a minute if he thought the deal wasn’t right for PSA.”

With the boards at both companies meeting today, how they view the possible tie-up could become apparent rather quickly.

But there could be yet another wild card to consider. With a General Motors contract now in hand, the United Auto Workers Union is trying to negotiate a deal with Ford Motor Co. The union will then head to Fiat Chrysler to wrap up quadrennial contract talks.

(PSA’s Tavares Throws Cold Water on Hot Fiat Chrysler Rumor)

Those negotiations were expected to be intense and for a variety of reasons, including FCA’s extensive use of contract labor. But just as the French government is expected to press to preserve jobs in that country in the event of a merger, labor analysts say the UAW may want to address the potential impact of an FCA-PSA tie-up, as well, adding a twist that could prove quite challenging.

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