Following months of talks, Fiat Chrysler has unveiled its proposed €33bn merger with France’s Renault.
But the hard work has only just begun. The deal faces a host of obstacles before it can cross the finish line.
From regulatory hurdles to the delicate relationship with Nissan, here are some of the pitfalls that could scupper FCA’s plan to create the world’s third-largest carmaker.
Political: the reaction of France and Italy
The car industry is a hostage to political interference more than most sectors.
Governments seek to champion their domestic players and protect jobs, something that often runs against the need to slash costs after a merger.
Bruno Le Maire, France’s finance minister, said on the radio on Tuesday morning that his first priority “is to protect industrial jobs and industrial sites”.
Italy’s reaction has so far been warmer.
Matteo Salvini, deputy prime minister and Italy’s most powerful politician, has said the deal was “a brilliant operation that preserves every single job.”
In proposing the deal, FCA vowed to avoid plant closures, a move intended to allay political concerns.
“These countries [involved in the merger] including Italy, our country, will see great benefits if this opportunity goes ahead,” promised FCA chairman John Elkann.
Francesco Zirpoli, a professor of management at Venice’s Ca’ Foscari University, argued the balance of power between France and Italy would be the “central dilemma” of the proposed deal.
Even though it seeks no role in guiding the strategy, France will want to make sure it defends its rights as a shareholder, particularly given it is set to lose its double voting rights, and see its share holding diluted from 15 per cent to 7.5 per cent.
Although the Italian government does not own shares in FCA, it may seek to bolster its influence.
While Mr Salvini applauded “a brilliant deal”, he also suggested an “Italian institutional presence” could be desired in the merged group to defend Italian interests.
Yet, according to one Renault shareholder: “The biggest question is still whether the French government will back the deal or not.”
Governance: the battle for board seats
The largest source of conflict could be the allocation of board seats.
According to people close to the state, France will expect a seat on the board of the newly created group. As it stands, FCA’s merger proposal does not do this.
France will argue that nothing less should be expected if Nissan, which will also have 7.5 per cent in shares, is to have a board seat.
“It’s very simple: we want to keep our presence on the board,” said one senior government official. “Why would Nissan have a seat on the board and not the French state?”
Excluding the French state from the board would emphasise the resulting company’s independence from national interference and be a sop to Nissan, which is keen to see less French government meddling in alliance affairs.
But people close to Nissan say that because the merger envisages both Nissan and the French government holding equal stakes in the new entity, the Japanese carmaker has assumed the French state would attempt to maintain its influence using a seat on the board.
While the proposed business would be Dutch-registered, the location of the operational headquarters of the group would also be up for grabs. The French government will hope it can be housed in France, in the same way that Airbus found its operational home in Toulouse, even though legally its headquarters is in the Netherlands.
While FCA has two operational headquarters with Turin in Italy managing Europe and Detroit handling North America, under the former leadership of globe-trotting boss Sergio Marchionne, the company was in reality more often run from a private jet or a chauffeured car rather than a desk.
At present, the plan, according to people close to both companies, is to make John Elkann, who steers Exor, the Agnelli family investment vehicle, chairman of the merged group, while Renault chair Jean-Dominique Senard will be chief executive. Mike Manley, chief executive of FCA, is expected to be named chief operating officer.
However, there are concerns that a new chief executive will be needed longer term. Mr Senard, while highly respected, is 66 years old and unlikely to have a long tenure at the helm.
Regulatory: antitrust issues and the Trump factor
That Renault and Fiat have few overlapping global operations is an advantage when trying to convince antitrust authorities to wave through the deal.
But there are some red spots on the map where the two will have significant share.
Taking last year’s car sales, their combined market share in Europe will be 17 per cent, just ahead of PSA-Opel with 16 per cent but still a distance behind market leader Volkswagen, which has 23.8 per cent, according to Jato Dynamics.
In some countries, the tally rises far higher.
In Italy, FCA’s home market where it dominates, combined sales rise to 36 per cent, a level likely to attract the attention of antitrust authorities. Other smaller markets, such as Romania and Lithuania, have higher market shares but divestments there should pose no problems.
Significantly, in the largest markets of China and the US, where being forced to sell out could undermine the rationale for the merger, overlapping sales are small as Renault barely operates in either country.
“For the competition authorities there isn’t much to worry about in our view, the main two potential areas to look at are light commercial vehicles and Italy,” said Thomas Besson, an analyst with Kepler Cheuvreux.
Even though Renault does not operate in North America, one unpredictable factor is the Twitter-happy US president, who may want to interfere in a deal involving one of Detroit’s crown jewels.
One person close to Renault said that after the merger proposal was announced the teams had watched in case Donald Trump decided to weigh in.
“If Trump wants to block the deal, he probably can,” said Mr Besson, arguing the president might view a longer-term deal with Nissan as compromising US brands such as FCA’s Jeep and Ram subsidiaries and thus threatening US jobs.
“And if he does block it, that means there is no likely deal possible for FCA afterwards. The Chinese would clearly be out too,” added Mr Besson.
Valuation: Renault shares hit by Ghosn arrest
Renault shareholders argue that their company’s valuation has been depressed by the arrest of Carlos Ghosn, the ousted head of the alliance between the French group and Nissan, and the turmoil that generated in the partnership.
“FCA is getting access to a 43 per cent stake in Nissan without paying for it . . . Renault’s share price has been pushed down over the past year. The reference point and methodology used are extremely opportunistic,” said Mr Besson.
Renault’s stake in Nissan, as well as the share price fall since Mr Ghosn’s arrest in November, could confuse the calculations of the company’s value.
Working out a fair value for Renault — a value that will affect the dividend paid by FCA to its shareholders — will therefore not be easy, something rivals and bankers are keen to point out.
“In addition to finding an industrial solution to its problems, FCA has also pulled off an impressive financial manoeuvre, to the detriment of the longstanding financial interests of the shareholders of Renault, including the state,” said one such banker, arguing that FCA had the upper hand in the deal.
Spoiler deals: the risk of rival bids
FCA has met with many potential suitors over the past few years, from BMW to Geely, and if an alternative deal was possible it would have probably happened already.
PSA was also in talks with FCA and was thought to be open to a merger. While Renault’s arch-rival will feel jilted at the altar, the chances of it coming in and launching its own bid for FCA are low, according to bankers in Paris and London.
For one thing, any move by PSA would require the backing of shareholders, and the French state, which has 15 per cent of Renault and 14 per cent of PSA. The French state is unlikely to sanction a France-on-France showdown that could result in no deal at all.
Nevertheless, rival carmakers are circling with investment bankers queueing up to help them. A surprise bid from left-field is not out of the question.
Nissan: Japanese carmaker’s secret treaty
There is also one further but potentially explosive unknown factor: the treaty between Renault and Nissan that was revised in 2015, known as the Restated Alliance Master Agreement, or “Rama”.
It is the document that regulates the alliance and remains closely guarded, so much so that FCA has not yet seen the document, according to people on both sides of the deal.
Such is the secrecy of Rama that it is unclear whether the full document will be made available to FCA, even during the due diligence process.
People close to Renault claim, and have assured FCA, that there is nothing in it that could scupper the talks or that would mean the alliance agreement could be renegotiated in the wake of a merger.
Nissan has yet to make any comment on whether it agrees with Renault that Rama poses no obstacle to a deal. The Japanese group may even view Renault’s proposed merger with FCA as an opportunity to renegotiate Rama, said one person familiar with the talks.
However, early indications are that Nissan will not derail the deal.
Nissan chief executive Hiroto Saikawa told reporters in Japan on Wednesday evening that he did not see “anything particularly negative” in the deal but added that he needed to “carefully weigh what the benefits are for Nissan and the challenges that need to be overcome”.