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Peugeot SA - The Absolute Outcome Is More Important Than Equality

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About: Peugeot S.A. (PEUGF), PUGOF, PUGOY, Includes: FCAU, FURCF
by: Christoph Liu
Christoph Liu
Growth at reasonable price, long-term horizon, dividend
Summary

The planned merger of Peugeot SA and Fiat Chrysler Automobiles NV is a win-win situation.

Based on the respective valuations prior to the announcement and taking into consideration pre-merger distributions FCA shareholders profit to a higher degree.

That, however, does not at all mean that the deal is unfavorable for PSA shareholders.

It would be irrational to endanger the gains from the merger over concerns for equality.

I therefore believe that there is no reason for PSA shareholders to oppose the deal.

The planned merger of Peugeot SA (OTCPK:PEUGF;OTC:PUGOF;OTCPK:PUGOY) and Fiat Chrysler Automobiles NV (FCAU) is a win-win situation for both partners. Relatively speaking, however, shareholders of the latter would profit to a higher degree. Still, I do not think that this should be a reason for PSA shareholders to oppose the merger. After all, they are still set to profit handsomely from the deal. And since that is the case, it would surely be foolish to put this gains at risk only because others might profit even more. In this article I will explain in more detail why FCA shareholders profit to a higher degree from the merger as well as why that should not be a problem for PSA shareholders.

FCA Shareholders Get The Better Deal...

First of all, let's have a look at how FCA shareholders profit to a higher degree. Taking into consideration the respective stock prices prior to the announcement of the merger plans, PSA had the higher market value. Since both sides will own half of the combined company, this alone would put FCA shareholders slightly ahead of their PSA counterparts mathematically.

However, what really shifts the balance in favor of FCA's owners are the pre-merger distributions to be made. PSA will spin-off a 46.34 percent stake in Faurecia SE (OTCPK:FURCF). These holdings have a value of slightly above €3 billion as of the time of writing. FCA on the other hand will distribute a special dividend of €5.5 billion in cash and its robotics subsidiary Comau, which is believed to be worth some €250 million.

While one might point out that in turn the PSA side will have an effective board majority given that its CEO, Carlos Tavares, will lead the combined company, this does not really benefit shareholders. Sure, this might mean that wherever there are redundant positions, the PSA employees are maybe more likely to be the ones to keep their job. But for (individual) shareholders that is of no relevance. On the contrary, Carlos Tavares becoming CEO is actually another benefit for FCA shareholders as they gain the benefit of a highly skilled leader, while PSA already had said leader. So all in all, FCA shareholders arguably get the better deal in relation to PSA's owners.

...But It's Still A Good Deal For PSA Shareholders

Be that as it is, PSA shareholders will still be better off with a merger than without it. As I have previously explained, a merger makes a lot of sense for both partners. In total, the two companies estimate a potential of €3.7 billion in annual run-rate synergies based on the assumption that there will not be any plant closures. FCA's strong North American business also compensates for PSA's core weakness in terms of geography.

FCA furthermore owns two premium brands that have ample potential to be developed: Alfa Romeo and Maserati. PSA in turn only has its DS Automobiles brand, which does not have near as much history and repute as Alfa Romeo does. Admittedly, there is much work to be done and considerable investments to be made, but together FCA and PSA could use especially Alfa Romeo's potential.

Maybe most importantly, together the companies are much better positioned to face the inevitable challenges of coming up with more environmentally friendly and more autonomous transportation solutions.

For all those reasons the merger is a great deal for PSA and its shareholders.

The Merger Should Not Be Endangered Over Equality Concerns

But would it not be an even better deal if PSA would renegotiate in order to have its current value better reflected? In theory of course it would be. But then again there would be the risk of killing the merger. FCA has demonstrated in the past that it does not hesitate to terminate negotiations if the counterpart signals (potential) unwillingness to get the transaction done as agreed upon. One only has to remember the termination of the merger talks with Renault SA (OTC:RNSDF;OTCPK:RNLSY) earlier this year. And I firmly believe that it is not worth taking the risk.

It is common knowledge that people often tend to value equality higher than absolute outcomes. Just think for example of the famous ultimatum game. That might be psychologically understandable, but nonetheless it is irrational. And investors' goal should be to be as rational as possible. Hence, I firmly believe that PSA shareholders should not put at risk the gains they are set to reap from the merger over irrational concerns for more equality.

Conclusion

In conclusion I believe that the merger with FCA is a great deal for PSA shareholders. The fact that FCA shareholders might profit to an even higher degree does not change that. I firmly believe that it is not worth risking ones own gains in order to prevent someone else from profiting more. Thus, I think that there is no reason to oppose the deal on those grounds.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: All research contained in this article was done with the utmost care. However, I cannot guarantee accuracy. Every reader is advised to conduct his or her own due diligence and research.

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