Fitch Ratings believes further corporate transactions are likely in the car manufacturing sector and could involve European manufacturers including Fiat Chrysler Automobiles, Peugeot and Volkswagen.
“Despite what can appear as an already limited number of large global players compared with other more fragmented industries, we believe that the automotive sector is set to consolidate further globally, possibly including European companies,” the agency said in a statement.
Go deeper with GlobalData
Discover B2B Marketing That Performs
Combine business intelligence and editorial excellence to reach engaged professionals across 36 leading media platforms.
“In our view, the primary driver for consolidation will be the increasing need to share investment and development costs and to further diversify. We believe that consolidation may be an inevitable step for the weakest manufacturers to survive in the long term, although paradoxically, the rating impact of a material acquisition is likely to be initially negative, notably for non-investment grade groups with reduced financial flexibility.
“In addition, we note that social and political considerations could complicate or deter otherwise necessary and sensible mergers, similar to what happened when manufacturers looked to streamline their cost structures and industrial footprint in Europe following the 2008-2009 crisis. However, while the industry’s M&A track record is not flawless, as demonstrated by the mild success or outright failures of some mergers and acquisitions in the past, we believe that a number of transactions have been successfully implemented and eventually improved manufacturers’ credit profiles.
“The automotive sector is capital intensive and car manufacturers need increasing financial means to finance substantial capex and R&D. As profitability remains relatively weak compared with other industries, amortising costs on a greater number of vehicles through alliances is an alternative option favoured by carmakers. This should be a chief driver of further consolidation. In particular, increasing investment is necessary to tackle regulations, notably on emissions, fuel efficiency and safety; the integration of new technologies in vehicles; the trend towards autonomous driving; the development of future powertrains; and volatile customer demand.
“International M&A should also be supported by the global nature of the industry. Most manufacturers are active in all regions, often with different regulations and consumer tastes. Economic and industry cycles can be different between markets and the highest-rated manufacturers are typically well diversified to smooth the impact of a downturn in one particular market. Therefore, those manufacturers most exposed to one or a few markets will need to expand their footprint, either through expensive organic growth, whose financing may ultimately need to be shared with a new partner, or external growth through M&A.
“In addition, we believe that most European manufacturers are in a healthier financial situation now than a couple of years ago and have replenished their cash reserves. Financing conditions have also become increasingly attractive in the past 12 to 18 months and could entice manufacturers to tap capital markets and lock in cheap credit conditions, notably long term.
“For example in early January 2015, Volkswagen issued bonds with maturities of eight years and, for the first time, 15 years. In our view, the most likely European candidates to be involved in M&A include FCA, PSA and Volkswagen. The latter has had an extremely busy history of corporate transactions and could act as a further consolidator, while FCA’s and PSA’s weaker credit profiles could trigger a large alliance or merger to improve their long-term positions in the sector. In addition, we believe that the recent deals completed by FCA and PSA could be a prelude to further transactions.
“Fiat completed the full acquisition of, and merger with, Chrysler in 2014 and has announced that it will spin off Ferrari in 2015. The combination of Fiat and Chrysler provides FCA with balanced exposure to Europe, the US and Latin America while the Ferrari transaction, combined with a capital increase and the issuance of a mandatory convertible bond, will strengthen FCA’s financial position. However, FCA still lacks robust and steady exposure to Asia, especially China. In addition, we believe that FCA’s ambitious growth strategy may prompt the group’s management and main shareholders to consider a new global partner to grow and diversify further.
“PSA remains a relatively small player in the industry, compared with other large mass-market manufacturers, but with great ambitions. This was compounded by PSA’s new shareholding structure in 2014, including the arrival of Dongfeng Motor as a majority shareholder, in line with the Peugeot family, and the nomination of a new CEO, as well as the group’s strategy to enhance its presence outside of Europe, notably in Asia. The combination of these factors could end the historical reluctance of the Peugeot family to engage in large M&A deals. Nonetheless, the complex shareholding structure and the significant work to sustainably improve the group’s underlying profitability and cash generation could impede the implementation of a large corporate transaction in the short term.”
