General Motors and Fiat Chrysler Automobiles have turned to investment banks for help to deal with a stand-off as FCA seeks to force a merger with its Detroit-based rival, according to a news agency report.
GM is being advised by Goldman while FCA is working with UBS on the matter, several sources told Reuters, with one adding that Morgan Stanley was also working with GM.
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GM’s board rebuffed a merger proposal from the Italian-American carmaker earlier this year and chief executive Mary Barra said last week she had no interest in a combination.
Barra’s rejection has not stopped FCA boss Sergio Marchionne working on a merger plan, according to the Reuters sources. They said he was lobbying GM investors in an effort to drag the GM board to the negotiating table.
GM signed a letter of engagement with Goldman Sachs earlier this week seeking advice on FCA, one of the sources said.
GM senior vice president Tony Cervone did not confirm that his company was retaining Goldman Sachs or Morgan Stanley specifically on the FCA merger approach.
When asked by Reuters about the matter, he said: “It would be inconceivable for General Motors not to be talking to any number of advisers about normal business operations but I’m not going to list the issues one by one.”
Spokesmen at FCA, Goldman Sachs and Morgan Stanley declined to comment to the news agency.
FCA is working with Swiss bank UBS on its strategy, while Fiat’s founding Agnelli family, which holds around 30% of FCA via investment vehicle Exor, is being advised by Lazard, the sources said.
A spokeswoman at UBS confirmed it had an ongoing relationship with FCA but declined to comment on the General Motors situation.
Lazard also declined to comment.
FCA’s move on GM comes amid concerns the industry is heading for a downturn which would hammer company valuations, Reuters noted.
“For Marchionne it’s now or never,” an industry banker told the news agency, saying that industry valuations had reached their peak.
FCA is much smaller than GM which has a market value of about $57bn and annual revenues of around $156bn.
FCA, with a market capitalisation of $20bn, reported revenues of EUR96bn last year. It has one of the highest debt piles in the industry, with net industrial debt at EUR8.6bn.
Much of FCA’s market value is tied up in Ferrari, which Marchionne has often described as a “phenomenal carrot” to investors.
But sources close to FCA told Reuters any merger with GM would not include Ferrari since the Agnelli family wants to retain control of the luxury unit and go ahead with a listing plan.
John Elkann, the scion of the Agnelli family who acts as FCA chairman, also wants to retain a minority interest in a combined entity with GM, the sources said.
Ferrari was initially set to hit the stock markets in the first half of 2015 but FCA subsequently pushed the listing back to at least mid-October.
While a hostile move for GM is seen as a long shot, Marchionne is trying to lobby investors to support his case that GM and FCA would be better off merged, the sources said. The combined entity would be able to spread the high costs of developing vehicles, including greener and more high-tech cars.
The mechanics of a hostile bid look “beyond ambitious”, Bernstein analyst Max Warburton said in a note cited by Reuters, while adding: “Stranger things have happened, especially in bubbly equity markets.”
GM does not have a single controlling shareholder and its top investor is Brock Capital Group with an 8.7% stake.
Brock Capital is the fiduciary that manages the shares for the United Auto Workers healthcare trust for retired workers. Analysts told Reuters the US labour union would view a GM-FCA merger with scepticism because of the potential resulting job losses.
Based on expectations that shareholders would demand a 35% premium to GM’s market capitalisation, FCA would need to pay about $77bn in an all-stock transaction in the event of a hostile bid, the news agency’s sources said, adding that GM shareholders would likely demand a substantial payout. But FCA would be under enormous financial strain if it decided to pursue a hostile bid.
Reuters noted some bankers argue that Marchionne – widely seen as an aggressive dealmaker – is unlikely to let that stop him while his chairman, Elkann, said in May the carmaker would “act with determination” if it found a target that “made sense”.
