Analyst: Failed Fiat Chrysler-Renault Merger A Positive For FCA

Fiat Chrysler Automobiles NV FCAU’s decision to scrap its proposal to merge with or acquire French car company Groupe Renault is likely a good idea for the makers of Ram trucks and Jeep Wranglers, but both companies face broader headwinds, according to sell-side analysts. 

FCA said Wednesday that it withdrew its proposal to merge with Renault after foot-dragging by the French government, which owns a more than 15-percent stake in the company, long seen as an icon of French industry. FCA said it had become clear that “political conditions in France do not currently exist for such a combination to proceed successfully."

Nissan Motor Co Ltd NSANY, Renault’s major global partner, also said the merger would require a “fundamental review of the existing relationship between Nissan and Renault.”

Profit Challenges In Europe 

Bank of America Merrill Lynch analyst John Murphy said the merger failure was positive, but remained Neutral on Fiat Chrysler stock with a $20 price target.

Europe just isn’t where the money is in car sales for FCA, the analyst said. 

“We view this development as a slight net positive for FCA,” he said in a Thursday note.

While a deal would have created the third-largest global automaker, it would have also increased FCA’s scale in Europe, which Murphy said “is already increasingly profit-challenged.”

And a tie-up would offer FCA no help in North America or China.

The failure of the merger may have also saved Fiat Chrysler from some brand risk, Murphy said.

Much of Fiat Chrysler’s profits come from Dodge Ram pickups and the Jeep Wrangler — two brands with images that bleed red, white and blue. 

If U.S. customers perceived the merged company as more European and no longer “American,” it could have sent some U.S. customers over to Ford Motor Company F and General Motors Company GM, the BofA analyst said. 

While seeing the merger's failure as a positive, Murphy said he remains Neutral on FCA because of macro risks for the core business, including the possibility of weaker sales overall in the U.S. and China; Europe volatility around Brexit; and other issues.

UBS analyst David Lesne, who covers the Renault stock on the French exchange Euronext Paris, said UBS sees limited downside risk to the French carmaker’s share price in the near-term. UBS has a Neutral rating on Renault with a 58-euro ($65.39) price target. 

Price Action

Fiat Chrysler shares were trading higher by 0.83 percent at $13.30 at the time of publication Thursday. 

Related Links:

Fiat Chrysler Withdraws Merger Proposal With Renault

Morgan Stanley: Fiat Chrysler's Proposed Tie-Up With Renault A 'Good Strategic Fit'

Photo by Thesupermat via Wikimedia.