Fiat’s Marchionne Considers European Tie-up After Chrysler Deal

Jan. 23 (Bloomberg) -- Fiat SpA Chief Executive Officer Sergio Marchionne, architect of a planned tie-up with Chrysler LLC, may still regard a European alliance as his top priority.

Marchionne, credited with transforming Fiat from the laggard of the European auto industry into one of the continent’s most fashionable brands, said yesterday he’s “willing to start a dialogue” with any company that favors consolidation.

“A partnership with a European rival is vital,” said Emanuele Vizzini, who helps manage about $1.2 billion at Investitori SGR in Milan and lists PSA Peugeot Citroen of France and Germany’s BMW as two “natural candidates” for a merger with the Turin, Italy-based company.

European car sales plunged the most in 15 years in 2008, causing automakers to lay off workers and idle plants to clear stocks. Fiat yesterday cut its earnings forecast and said it won’t pay a dividend. Marchionne last month suggested the crisis could leave three European volume producers standing: Volkswagen AG, Renault SA and a third company built in a bout of consolidation.

The CEO acknowledged yesterday that many in the industry view a Fiat-Peugeot combination as a “marriage made in heaven.” He said he needs to proceed “softly and quietly” toward his goals.

Fiat’s alliance with Chrysler will see it transfer small-car technology to the Auburn Hills, Michigan-based automaker in return for a 35 percent stake and access to its U.S. plants, the companies said Jan. 20.

No Solution

With Fiat’s sales strongest in Europe and Latin America and Chrysler focused on producing larger autos and SUVs for North America, the deal entails little overlap in products or markets. In a recession, that may be no good thing, said David Arnold, an analyst at Credit Suisse in London.

“The Chrysler deal does nothing to solve the overcapacity problem,” said Arnold, who also favors a tie-up between Fiat and Peugeot. An all-European deal could “offset spiraling costs and declining volumes with savings from joint procurement, capital expenditure and research and development.”

Obvious overlaps between the activities of Fiat and Peugeot “would allow significant potential savings via joint purchasing from common suppliers,” Credit Suisse said in a note Jan. 12, when it predicted a tie-up between the two companies some time this year. Technology and components would also be spread across more models, reducing overall development costs, the bank said.

Marchionne, 56, is targeting the U.S. following his success in ending four years of losses at Fiat in 2005 with the introduction of new versions of the Punto and Panda and a revival of the 500 minicar, as well as partnerships with competitors to spread costs.

Not Last

Addressing analysts following an earnings announcement yesterday, Marchionne refused to comment directly on the prospects for Fiat getting together with specific companies.

“Chrysler is a first step in that direction -- it’s certainly not the last,” Marchionne said, adding that the U.S. company will have a “pretty good opportunity” to recover from the brink of bankruptcy with the help of Fiat’s technology and opportunities for joint savings.

Fiat, controlled by the Agnelli family, said 2009 profit will be “in excess of 300 million euros,” compared with an initial target of at least 2.9 billion euros. The company burned 30 million euros a day in the fourth quarter, causing net income to tumble 71 percent to 163 million euros.

“We’re telling our clients not to be distracted,” said Adam Jonas, an analyst at Morgan Stanley in London who rates the company “underweight.” “The stock’s not going to trade on how well re-badged Fiats are going to do in the U.S. in 2012.”

When Fiat supplies small cars in the U.S., they will be “re-badged” under one of Chrysler’s brands.

World No. 3

A combination of Fiat, Chrysler and Peugeot-Citroen would create the world’s third-biggest carmaker by volume after Toyota Motor Corp. and General Motors Corp. and would be tough to manage, said Sven Kreitmair, a credit analyst at UniCredit in Munich who cautions against a three-way deal. Obstacles would include the involvement of three different governments, he said.

Peugeot spokesman Pierre-Olivier Salmon declined to comment on the likelihood of a deal with Fiat. Bayerische Motoren Werke of Germany, the largest maker of luxury cars, aims to continue talks about cooperation between its Mini unit and Fiat’s Alfa Romeo brand, spokesman Marc Hassinger said Jan. 21. The company couldn’t be reached for further comment yesterday.

The French state, which has pledged as much as 6 billion euros to help Peugeot and Renault survive the recession, has already sounded a cautious note about any tie-up with Fiat.

“I’m not convinced consolidation is the answer,” Industry Minister Luc Chatel said in a Bloomberg Television interview Jan. 13. “What we need to do is improve compeitiveness so that we can keep automobile production in France.”