Autos

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Carmakers are among the worst offenders when it comes to destroying value through M&A. DaimlerChrysler and BMW AG's ill-fated takeover of Rover Group spring to mind. 

Yet having a competent CEO should at least mean the process isn't doomed before it starts.

Carlos Tavares has transformed Peugeot SA since becoming CEO in 2014. So his plan to merge the French carmaker with General Motors Co.’s European operations, reported by Bloomberg News, at least merits consideration.

Having been forced to seek a state bailout in 2014, Peugeot is in decent fettle. It generated a 6.8 percent operating margin in the first half of 2016, mighty impressive for a mass-market car marker. The French company also has much more balance sheet flexibility these days. Its carmaking operations had 11 billion euros ($11.7 billion) of cash and equivalents at the end of June, far exceeding its financial liabilities.

Investors have been rewarded for their patience: the stock has gained more than 400 percent since a 2012 low. However, there was always a question about what happened next.

While Tavares has swung the ax at Peugeot, he couldn't keep doing that forever. Carmakers have little choice but to lift spending to make sure their vehicles comply with emissions regulations, and to not get left behind as cars become more like computers on wheels. 

A Cut Too Far?
PSA has been spending less on R&D than rivals over the past five years
Source: Exane BNP Paribas
Ratio is a 5-year average but does not reflect 2016 results

With 3.1 million vehicle sales last year, Peugeot (which also owns the Citroen and DS brands) is much smaller than GM, Volkswagen AG and Toyota Motor Corp., which each sell about 10 million vehicles a year. Finding a partner to share the R&D burden makes sense.

Even so, Opel/Vauxhall is a curious choice. GM's European arm has failed to make a profit in recent years despite countless turnaround plans and management changes, so it's plausible that the U.S. parent would rather be rid of it. And GM has form. It put Opel up for sale in 2009 before changing its mind. 

Poor Prospect
General Motors' losses in Europe have narrowed but the unit is still a burden on the parent
Source: Bloomberg

Peugeot and GM previously agreed to share vehicle platforms and components, so the French company should know what its dealing with. Joining the two would doubtless create opportunities to slash production costs and overheads.

But there are limits. Neither the French government, a Peugeot shareholder, nor Opel/Vauxhall’s powerful trade unions are likely to embrace proposals that involve closing plants. Cutting jobs while Europe's car market is booming would be difficult to explain.

Nor will a Opel/Vauxhall merger solve Peugeot’s other weakness: its dependency on Europe. It has made efforts to boost sales in emerging markets, but Europe still makes up about 60 percent of its vehicle sales. Adding 1.2 million Opels and Vauxhalls would increase that to nearer three-quarters.

That's not to say there aren't potential rewards here -- if Tavares can manage the delicate political feat of cutting capacity. Europe has too many car plants and it makes little sense to duplicate the technology and cars that usually end up looking and functioning much the same. The belief that Tavares might be the right person for this explains why Peugeot shares gained almost 4 percent on Tuesday. Governments and trade unions will take more persuading though. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net