Fiat Announces Earnings And Merger - BMW (OTC:BMWYY)

On October 30th, the boards of Fiat Chrysler Automobiles FCA and Peugeot's PUGOY parent PSA Group announced that they are in merger talks due to seeking scale in coping with costly new technologies needed to meet the electric future. And there's also the slowing global auto demand at a saturated market.

Additionally, FCA showed it is somewhat resisting this downward trend on Thursday as despite a small loss, the Italian-American manufacturer at least managed to beat third-quarter earnings forecasts thanks to record profitability in its North American segment. Fiat Chrysler shares jumped nearly 9%, just a day before it released its third-quarter earnings, following its PSA announcement earlier in the morning. Overall, they increased 8 per cent higher following the quarter earnings results.

Fiat Earnings Report

The company reported higher than expected operating earnings with a record €1.96 billion as opposed to expected €1.89 billion. North America is surely the company's brightest point what triggered the boost with record profits of €2bn and record margins of 10.6 per cent due the growth of its pick-up truck line. They also managed to narrow losses in its Maserati line. On the other hand, losses in Europe increased from €30m to €55m.

The company reported a small loss in the last quarter due to writing off €1.4bn from its struggling European car business and its Alfa Romeo brand. This is the result of the company's strategy to reposition these divisions for the future. As for Europe, the company wrote off €435m as it shifted the Fiat brand away from smallest models to more profitable vehicles. And the remaining €941m is from Maserati and Alfa Romeo due to technological alterations on its platform so it can now accommodate the production of electric vehicles.

But even when we exclude the charge, adjusted profits dropped 6 per cent at €1.3bn due to a higher US tax charge that is upon the company. The company expects a further improvement of its financial performance next year.

Stronger Together

The $48 billion merger would create the world's fourth-biggest carmaker by 8.7 million in annual vehicle sales, with a market value of around $50billion. PSA's Carlos Tavares would be CEO of the combined group and Chairman of the board would be Fiat Chrysler's John Elkann, who also sits on the board of the Economist's parent company.

The merged group would enable to make €3.7billion or $4.1billion of annual cost-savings in Europe's stagnant market with rigorous environmental regulations that are making the lives of all automakers quite difficult. The combined group would include brands that serve both mass and premium markets, covering also truck and light commercial vehicles markets.

Competitors

This merger would put the company just behind Volkswagen AG VWAGY, Toyota Motor Corporation TM and the Renault RNLSY- Nissan Motor Co. NSANY combined forces.

But even the biggest players in the industry are making changes as Volkswagen and Ford Motor Company F have combined forces to develop electric and self-driving vehicles. German carmakers BMW BMWYY and Daimler DDAIF are developing driverless technology as part of their new venture. Honda Motor Co. HMC will invest $2 billion over 12 years in General Motors Company's GM self-driving car unit. And despite the strike that will impact even US' GDP with the cost of $3 billion for the company, GM managed to make a profit during the last quarter.

When looking at last year and combined, Fiat Chrysler and PSA sold 8.7 million vehicles last year. This is ahead of General Motors' 8.3 million, and not far behind Volkswagen and Toyota, which both went above 10 million.

Concerns

FCA would gain access to more modern vehicle platforms which would help the company be at more ease with emission regulations. PSA on the other hand, would benefit from FCA's profitable U.S. business as its focus is mostly European.

But FCA has already attempted to merge with Renault earlier this year, a deal that was ruptured by the French government which is Renault's biggest shareholder and this deal could also face regulatory scrutiny as French and Italian governments will surely worry about potential job losses. But there's a long way to go before the deal is formalized. Also, even if achieved, this merger does not help either side in expanding its presence in China which is the world's largest market and both of them are weak in this segment.

But if the deal goes through, there's always the power of synergy that 1+1 is always more than two and together, they would become the world's fourth carmaker by vehicle sales and surely both companies would gain greater power to survive and hopefully, thrive, in an evolving industry.

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