The market is giving more tricks than treats on this rainy Halloween in New York City. Case in point: The news that PSA Peugeot Citroen and Fiat Chrysler Automotive (FCAU) are in merger talks.
While there is no guarantee that a merger will occur, reading the press releases this morning gave me déjà vu. As I have mentioned in prior Real Money columns, I was a sell-side auto analyst for 11 years, first in New York, then in London. So, I followed DaimlerChrysler, Fiat, Peugeot and even component companies Magneti Marelli and Faurecia.
When it comes to the Euro autos sector, I guess one could say I have seen it all. So, it was with a mirthless chuckle that I read from FCA's press release this morning that the deal would result in "Approximately €3.7 billion estimated annual run-rate synergies without any plant closures resulting from the transaction."
The DaimlerChrysler fiasco taught me one thing about auto mergers: Without plant closings, there will be no realized synergies. So, a more realistic synergy estimate for an FCA/PSA combination is zero euros. Yes, nothing.
The proposal indicates that FCAU holders will receive a $6.1 billion (5.5 billion euro) one-time dividend, upon the deal's closing, as well as the spin-off of Fiat's industrial automation business, Comau. That dividend amounts to $3.90 per FCAU share. Basically, that payment will allow Fiat Chrysler holders to partially monetize their holding in the company's crown jewel, Jeep. It is not an overstatement to say that every competing auto executive I have ever spoken to is envious of Chrysler's ownership of the Jeep brand.
FCAU also released third quarter results Thursday morning, and the value of Jeep couldn't have been clearer. FCAU managed to lose money in Europe and continues to have near-zero traction in China, but FCAU's U.S operations posted a smoking hot 10.6% operating margin in the quarter. That's Jeep, and to a lesser extent the value of the Dodge Ram pickups.
A 10% operating margin is a beautiful number, and one that General Motors' (GM) North American operations have exceeded -- pre-labor stoppage -- and Ford's (F) have approached. With the exception of the extreme high-end, which FCA lost by carving out Ferrari in 2015, there is no more attractive area in the global auto world than selling SUVs and pickups to American customers.
Coastal elites may choke on their lattes after reading that sentence, but while Elon Musk bragged about Tesla's (TSLA) 4.1% operating margin in the third quarter -- while facing virtually no competition -- FCAU's Mike Manley quietly and humbly dropped a 10.6% margin in North America, while having to compete with GM, Ford and Toyota (TM) in the lucrative U.S. truck market.
What's the least attractive area of the global auto industry? The European high-volume passenger car market. It's ugly. Without any plant closures a combination of Fiat and Peugeot will do nothing to rationalize this industry. Europe is dying demographically and the car industry is under increasing pressure from the far-left whackjobs who influence -- and, in some cases, actually are -- politicians and regulators.
So, if you are a FCAU shareholder, you are diluting the value of the incredibly attractive Jeep brand by bolting on a mass market Euro player -- Peugeot -- to the one -- Fiat -- that is already diluting your margins.
It's not a good deal for FCAU shareholders. I would never buy an auto stock this late in the global auto cycle, but overly optimistic projections of benefits from the transaction (I have read a few already) may make a combined FCA-PSA a very attractive short play.
In closing, I am certainly happy with the action in the bond markets Thursday, as my long iShares Barclays 20-plus Year Treasury Bond (TLT) calls are firing into the money. Also, I think the market will finally -- finally -- lose its myopic focus on the Fed and start to concentrate on individual company fundamentals.
