Breakingviews: Fiat can’t wait forever for Renault to sort itself

The collapsed 36 billion euro marriage of carmakers Renault and Fiat Chrysler Automobiles still makes a lot of sense. Yet that becomes less true with every day that passes.

Fiat Chairman John Elkann withdrew his merger offer in June after the French state signalled it wanted Renault, in which it owns a 15% stake, to sort out its alliance with Japan’s Nissan Motor first. That puts on hold 5 billion euros in potential cost savings – worth 33 billion euros to investors today, or almost as much as their combined market value.

Those goodies are still on offer, but the clock is ticking. Many of the touted savings involved Fiat adopting technologies and basic car designs, known as “platforms”, that Renault had already developed.

Take, for example, lower-emission vehicles. Elkann’s company, with a strong reliance on Jeeps and Dodge trucks, has been skimping on capital expenditures in this area. Over 2018 and 2019, Fiat’s total capex will be 13.7 billion euros, or 6% of revenue, using Refinitiv data. If Elkann had instead invested at Renault’s 8% ratio, Fiat’s spending would be almost one-third higher at 18 billion euros.

Why is that a problem? Imagine Renault spends another six months courting tepid partner and 15% shareholder Nissan, whose two directors planned to abstain last time on Renault’s board vote on the merger. That takes Elkann to March 2020.

A lengthy antitrust review would probably postpone the deal’s completion until well into 2021 – the year in which new European carbon emissions rules bite. That timeline isn’t good for Fiat, whose relatively dirty fleet of vehicles is further away than other major European carmakers from meeting its 2021 target, Goldman Sachs estimates.

Elkann has other options, including making investments using Fiat’s giant net cash pile, which should reach 4.5 billion euros at the end of 2019. He could also partner with German behemoth Volkswagen, which is building the world’s largest dedicated electric-vehicle platform; or even tie up with France’s Peugeot.

Turin-based Fiat will probably embark on one of these backup plans if Renault hasn’t come back to the table by 2020, three people familiar with the original merger proposal told Breakingviews. That gives the deal a fast-approaching expiration date.

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