Fiat CEO asked Opel, Peugeot for merger

Fiat SpA Chief Executive Officer Sergio Marchionne approached PSA Peugeot Citroen and General Motors Co earlier this month about creating a pan-European combination to leapfrog Volkswagen AG as the region’s largest automaker, three people familiar with the matter said. Marchionne proposed that Peugeot commit to a combination between Fiat, the French carmaker and GM’s German Opel unit in exchange for stock in the new entity, said the people, who asked not to be named as the proposal was private.

The CEO also offered to take Opel as part of the deal if he got $5 billion to $7 billion to restructure the unit, two of the people said.

The Fiat CEO is looking for a European partner to break the Italian carmaker out of its isolation in the region after GM and Peugeot announced an alliance earlier this year. Complicating any deal with Peugeot is the automaker’s acceptance last week of euro 7 billion ($9.1 billion) in bond guarantees from the French government, which will require the company to put labor and government representatives on its board.

“It’s an indication that it’s getting increasingly difficult, especially for the southern European carmakers,” said Frank Schwope, an analyst with Hanover-based Norddeutsche Landesbank Girozentrale. “Marchionne seems to be afraid to go under in the wave of joint ventures in Europe.”

A combination would have given the new entity more heft to compete with Volkswagen as the industry weathers the sovereign- debt crisis. Together, Fiat, Peugeot and Opel account for 25 per cent of the region’s auto sales, topping VW’s 24.8 per cent share. The three have struggled to reverse shrinking European sales as the crisis pummels consumer confidence. Vehicle deliveries in the region in 2012 may plunge by the most in 19 years, according to the ACEA manufacturers’ trade group.

Marchionne’s proposals never got to the negotiating stage because Peugeot favors its plan to ally with GM on purchasing and development projects, the people said. Peugeot also wants to restructure its workforce before engaging in talks for a broader alliance, one of the people said. Fiat, GM and Peugeot representatives all declined to comment.

“It looks like Marchionne is trying to achieve a situation where the EU volume players outside of VW just become ‘too big to fail’ and therefore end up in a stronger bargaining position than on their own,” said Erich Hauser, a Credit Suisse analyst in London. “But for the time being, I would put this down as wishful thinking.”

Fiat declined as much as 21 cents, or 5.1 per cent, to euro 3.91 and traded 4.4 per cent lower as of 4:4p pm in Milan. Peugeot dropped as much as 14 cents, or 2.9 per cent, to euro 4.77 and was 0.5 per cent lower in Paris.

Marchionne approached GM CEO Dan Akerson, GM Vice Chairman Steve Girsky, Peugeot management and members of the Peugeot family, which owns about 25 per cent of the company, the people said. In conversations with Peugeot, Marchionne has argued that the parties can create a Europe-focused company without any interference from American managers, one of the people said.

Marchionne, who unsuccessfully bid to buy Opel when GM was considering selling the unit in 2009, said October 10 in an interview in Brussels that questions on possible interest in Opel and Peugeot had been “asked and answered a number of times” and he didn’t “want to go through it” again.

Peugeot, based in Paris, is hesitant to partner with Fiat, which would increase exposure to Italy, Spain and France, while providing little advanced technology, two of the people said. The GM deal is preferable for Peugeot because of the US automaker’s large global presence, the people said.

GM has racked up $16.8 billion in losses since 1999 in Europe, including $361 million in the second quarter. The Detroit-based company reports third-quarter results tomorrow. Peugeot also has struggled, reporting an euro 819-million net loss in the first half. The carmaker said in July that it planned to cut 8,000 jobs and close a factory near Paris.

Marchionne has sought talks with Peugeot and GM for months, two of the people said. The 60-year-old executive, who has run the Italian automaker since 2004, is pursuing consolidation to help shield Turin-based Fiat from Europe’s declining fortunes, the people said.

Fiat today forecast a prolonged downturn in the European market after reporting a wider loss in the region. The third- quarter operating loss in Europe grew 61 per cent to euro 219 million.