Fiat And Renault: Is It A Done Deal?

It would be the first European carmaker with the heft of GM or Toyota

At a Mar. 11 Renault board meeting in Paris, directors questioned Chairman Louis Schweitzer about rumors in the Italian press that Renault would soon join forces with Italian auto maker Fiat. Schweitzer told his board that the reports were "fantasy." But at least one member wasn't convinced. Gerard Muteau, a union official who represents labor on the board, recalls that when Renault was negotiating an alliance with Volvo in 1990, rumors in the Swedish press were similarly denied by the French company's top management. "Three or four months later, Renault and Volvo announced their agreement," says Muteau.

Will history repeat itself? Sources in Milan and New York close to Fiat Chairman Gianni Agnelli think so. They tell BUSINESS WEEK that the two companies have secretly drafted a blueprint to create a $72 billion industrial giant. Turin-based Fiat, according to the scenario, will announce a massive $5.3 billion share offering reserved for Renault. That would give the French carmaker 40% of the Italian group. At a later stage, the Agnellis themselves could cede some or all of their Fiat stake to Renault. Agnelli says there is no big deal in the works "for the moment." But adds one Italian industrial insider: "It's pretty much all worked out."

A NEW GIANT? The sources say the companies planned to announce the accord as early as mid-March. France's embattled Socialist government, facing a probable landslide defeat in national elections Mar. 21 and 28, could have trumpeted the deal as a national victory that would make France the focal point of Europe's $150 billion car industry. One reason for the holdup: Francesco Paolo Mattioli, Fiat's chief financial officer has been held in a Milan prison since Feb. 22 on charges of corruption and violating laws on political-party financing.

Creating a Continental giant that makes almost one out of every four cars built in Europe makes sense for the French and Italian companies. Such a combined force would be the first European carmaker to have the heft of a General Motors Corp. or Toyota Motor Corp. It would break the competitive gridlock in the European car market, where six manufacturers--Volkswagen, GM, Peugeot, Fiat, Ford, and Renault--have carved out shares ranging from 10% to 17%. Together, Fiat and Renault have more than 21% of the market.

Fiat is ripe for a change. Chairman Agnelli, patriarch of the clan that holds 40% of the company, and Managing Director Cesare Romiti are both due to retire next year. That could leave a vacuum at the top of Italy's largest corporation. At the same time, Fiat is under financial pressure to fund a long-term $27 billion investment program.

On the Italian side, the timing may be good. The national government, which could stymie a blockbuster deal such as this, is weak and distracted by the worst political crisis in postwar Italy. Some government resistance is still likely. But "the deal could be sold in Italy as an important internationalization of Fiat rather than as giving up control," says an Italian industrialist.

Renault is now Europe's hottest success story in autos, turning in a $1 billion profit last year. The French are determined to do whatever is necessary to ensure that Renault survives. They are already trying to shore up one flank through the stock swap and cooperative ventures in design and manufacturing with Volvo. A deal with Fiat would add enormously to Renault's clout in Southern Europe.

CLOSE SCRUTINY. Privatizing Renault is high on the economic agenda of the French conservatives as they prepare to take power. Italian analysts believe that a swap of newly issued Renault shares with Fiat may be part of the deal. But others doubt that it would be that easy. "Fiat would dilute what is currently a very good story at Renault," says John Lawson, an analyst at DRI Europe (U.K.) Ltd. in London.

Such a megadeal would also get close scrutiny from European Community antitrust officials in Brussels. The EC approved Renault's cross-shareholding arrangement with Volvo, since the deal wasn't considered a strict merger. Still, asks John Ratliff, an antitrust lawyer with the Brussels-based firm of Stanbrook & Hooper: "If they can clear Renault-Volvo, why can't they clear something like Fiat-Renault?" And if the European auto industry needs another round of shaking up, Gianni Agnelli seems ready to do it.

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