PSA and Fiat Reportedly at the Altar for Economy-Driven Marriage

As recently as September, Marchionne seemed overwrought in predicting, at the 2008 Paris Auto Show, that the European car market would drop 5 percent next year.Only a few months on, the situation has deteriorated to the point where a 5 percent drop in sales in any market in 2009 will be seen as a resoundingly successful year. Year on year, Fiat is now facing a 30 percent drop in November sales in Italy alone, and the trend ahead shows things not getting any better either in Italy or in any of Fiat's markets worldwide.

In the meantime, PSA Peugeot-Citroën is doing better in France, but not by much, reporting a 17 percent drop year on year. The French also do not see upward trends happening anytime soon.

That may be why Marchionne, in an early December conference keynote speech, subliminally revealed his company's immediate strategy for onward survival. He pulled no punches when he said the survivors globally after this whole mess will number six conglomerates, each selling a minimum of 5.5 million units annually. His reference to a single European player could very well be a PSA-Fiat.

An inside source told IL a few reasons why this alliance could work really well. "For one thing, both companies are expert in smaller and inexpensive cars. Also, Fiat is number one in Brazil, a big emerging market where the French are weak."

In addition, they said, Fiat and PSA both are considered at the cutting edge of R&D on both gas- and diesel-powered small-displacement engines. And then, Fiat would also be bringing two more premium brands to the fold in Alfa Romeo and Lancia.

"All the parts essentially fit," confirmed our source.

Fiat Automobile is 100 percent owned by Fiat Group and represents 45 percent of the group's annual revenues. Analysts value Fiat Automobile at the equivalent of $3.2 billion, while all of PSA is valued at the equivalent of $4.2 billion. The basic dynamic would have Fiat Automobile merged into PSA Peugeot-Citroën. In exchange, Fiat Group would be the majority shareholder of the operation. (PSA is 30 percent owned by the Peugeot family.)

Interestingly, too, annual combined volume for Fiat and PSA in 2007 hit nearly 6.2 million, cleverly setting the new company squarely within range of Marchionne's vision of tomorrow.

Another contact in Paris unwilling to be identified simply says, "If all the numbers match up in the meetings, expect a big trans-alpine announcement very soon."

First big endeavour for the new PSA-Fiat mega-company? A worldwide low-cost brand to stuff a sock in the Tata Nano hype and take on Renault-Nissan's Dacia brand.

Inside Line says: If this merger happened, the combined company would immediately become the European number-four player. It could also mean, however, that Alfa would never ever make it to North America beyond the 8C. — Matt Davis, Correspondent