PSA Group said it remains committed to a merger with Fiat Chrysler Automobiles after French media reports said the tie-up could be threatened by economic fallout from the coronavirus outbreak, which has sharply reduced the market capitalization of both companies. The coronavirus fallout has called into question the financial terms of the merger, sources who are working on the transaction told the Paris-based Agence France-Presse news agency. The terms of the deal, which has been described as a merger of equals by both companies, might need to be reviewed, the French financial daily Les Echos said.
PSA and FCA signed a memorandum of understanding in December and said the merger could close in 12 to 18 months. Teams in France and Italy and working on operational details and submitting documents to relevant antitrust authorities, but they are allowed only limited contact until the closing. The terms of the deal agreed to in December call for FCA shareholders to receive a special dividend of 5.5 billion euros ($6.1 billion). PSA shareholders would receive the automaker's 46 percent share of Faurecia, a French supplier in which PSA holds a controlling interest and which would be spun off as part of the deal. The crisis has reduced the value of Faurecia. The question of proposed dividends is a sensitive one, as automakers seek to preserve cash to weather the crisis. In addition, if the global economy plunges into recession, automakers might need government-backed loans to cover expenses. "If PSA or FCA appeal to the state, how could they justify asking taxpayers for billions and distributing billions to their shareholders at the same time?" Gregori Volokhine of Meeschaert Financial Services told Agence France-Presse.
FCA said it would not comment on the reports.
PSA said in a statement that in the context of the coronavirus crisis, it would be "inappropriate to be speculating about modifications of the deal conditions. We are completely focused on protecting our employees and our company." PSA added: "We are taking the necessary decisions to ensure group sustainability. More than ever, this merger makes sense. Our teams continue to work with the same commitment."
Falling market caps
The merger would create the world’s fourth-largest automaker, with the aim of spreading the costs of expensive new technologies and taking advantage of greater scale. In December, the two companies had a combined market capitalization of around 42 billion euros, with FCA having a slight edge. The special dividends were agreed to in part to equalize the values of the companies. But movement and work restrictions put in place to combat the spread of the coronavirus have shuttered factories and showrooms for both companies. Chinese plants are starting up again, but neither PSA nor FCA has a strong presence there. FCA's share price has fallen from around 15 euros at the end of last October, when the proposed merger was announced, to less than 7 euros on Thursday, for a market capitalization of about 10.5 billion euros. PSA shares have fallen from around 23 euros at the end of October to around 12 euros on Thursday, for a market capitalization of 11.2 billion euros. Faurecia's market capitalization has shrunk by a third.
According to the merger agreement, there is a 500-million-euro termination fee in case of "change of board recommendation" and a 250-million-euro fee in case "the board has failed to hold a vote of shareholders before March 31, 2021." For example, if PSA’s board votes against the merger, the company would have to pay FCA the fee.
As the coronavirus pandemic halts auto production and puts the economy into a spin, on edge with millions filing for unemployment, automakers are considering how it might delay new vehicles. General Motors Co. on Thursday told employees it was extending its production shutdown in North America indefinitely, while Ford Motor Co. and Fiat Chrysler Automobiles NV want to restart U.S. plants April 14. The uncertainty of when production will restart, what the economy will look like after the pandemic scare and how that affects demand for new vehicles is likely to lead to changes in how, when and to what extent automakers stay on schedule with new-vehicle programs, especially those further out.
Source: The Detroit News
Canadian auto dealers are turning to their banks and captive finance companies for relief as consumers stay home and sales plummet during the COVID-19 pandemic. “Different lending institutions are coming up with different solutions, be it payment holidays to fee waivers… There’s a whole range of options there,” said Tim Reuss, CEO of the Canadian Automobile Dealers Association (CADA). “We’re not fully there yet, but quite a few [institutions] have extended certain considerations to dealers. But it’s going to take time to get through that.”
Dealers are adjusting to a new reality during the novel coronavirus outbreak, one marked by plunging demand and the closure of businesses deemed non-essential. Many dealers nationwide have either chosen or been forced to close their showrooms, though in many cases, service bays remain open for appointments.
New-vehicle sales are expected to plummet this month and heading into the second quarter, often the busiest time of the year for many Canadian dealers as the nation emerges from winter weather. As a result, many dealers are looking for relief from lending institutions on inventory and mortgage payments. “Most of us are shut down or semi-shut down, or even if you’re open, you’re barely covering your expenses with the revenue that you are generating,” said Shahin Alizadeh, CEO of the Toronto-based Downtown Automotive Group, which temporarily closed its stores this week. “They need to come to the party, and they all seem to be lined up to do exactly that.” Alizadeh said some institutions are offering dealers a holiday on curtailments, or the principal that a dealer owes to pay down floorplan inventory that sits on a lot longer than most vehicles, such as demo cars, loaners, and other aged inventory. “That’s a big ticket, which most of them have suspended for the time being,” he said. “Some banks, from what I understand, are doing some concessions on principal repayments on your mortgages, which is great. I think everyone is probably going to be charging their interest, which is fair, but I think principals are being delayed or deferred.”
Grant Simons, the head of automotive finance at the Royal Bank of Canada, said the bank has instituted a wide variety of programs designed to increase cash flow at dealerships. Those initiatives include a three-month curtailment program and six months of interest-only payments on term-loan facilities such as mortgages on properties. “Our client financial relief programs are designed primarily around creating flexibility for the customer, and the ability to help them manage their cash flow through the next period of time,” he said.
Steve Chipman, CEO of the Winnipeg-based Birchwood Automotive Group, said that while it is helpful in the short term for banks to take steps such as offering assistance on interest or mortgage payments, they do little to address long-term concerns about the health of the auto sector. Most health experts are advocating for social distancing measures to be in place for months to slow the spread of the coronavirus and prevent the health-care system from being overrun. “I don’t know if anyone knows where this is going,” Chipman said. “Interest assistance or 30 days of interest credit for your car, that’s helpful today and may help reassure people. But I think the bigger issue is trying to figure out where we’re going to be in six months.”
He said his “biggest concern” as it pertains to lending institutions and the dealer body is the health of captive finance companies owned by automakers. As revenue declines for automakers during the crisis, it might become more difficult for some of the captives to offer assistance to dealers, Chipman said. “When captive finance has lots and lots of money and the company itself is strong, then they can offer you some discounts,” he said. “But some of the manufacturers out there aren’t as financially strong, and it’s going to be difficult for them to offer assistance.”
Source: Automotive News Canada
The Canadian Automobile Dealers Association (CADA) is seeking assurances from automakers that they won’t penalize dealers opting to voluntarily close their businesses during the COVID-19 pandemic. Perry Itzcovitch of Calgary’s Hyatt Group and past CADA chairman says under most dealer agreements, “if you close, you’re in violation of your dealer agreement unless the closure is government ordered. If closure is just recommended you could be in jeopardy of losing your franchise.”
Current CADA President Tim Reuss says the association has asked automakers to clarify how they would enforce franchise agreement clauses governing voluntary closures.
While “quite a few” brands have said there would be no issues with closures at this time, “not every brand has been as forthcoming as that, as rapidly,” Reuss said. “We’re still working on that. There are still a couple of brands that haven’t done so.” He declined to name those manufacturers. “Contractual concerns aren’t something that any of us in the industry need right now,” he said.
Automotive News Canada has reached out to several automakers for comment. In an email Thursday, Fiat Chrysler Automobiles said: “FCA supports any decision our dealers make regarding the operation of their dealership during these challenging times.” Ford Canada echoed that sentiment, saying it was “100 per cent supportive of our dealers across the country making the best decision for their customers and employees regarding the continuity of their own sales and service operations, including decisions to temporarily close.”
Shahin Alizadeh, CEO of the Downtown Auto Group in Toronto, says he was in discussions with “senior management” at eight automakers before deciding to temporarily close his dealerships on Tuesday. He said automakers, in general, are only asking for dealerships that close to field online leads and to ensure that vehicles in need of “urgent services” are taken care of.
“In my opinion, it would be almost absurd for an OEM to take a hardline approach to this situation,” he says. “I don’t believe that’s what they’ll do, and that’s clearly not the impression that I’ve had with dealing with them. And I deal with eight of them. So, they’re generally on the same page as long as you provide minimum service for people to feel that they’re not left stranded.” He says his stores will arrange for emergency roadside assistance, battery service, and other offerings, even while his stores remain closed. “Given that, we’ve given our OEMs enough comfort to say, ‘Yeah, that works for now,’” Alizadeh said.
Seldom-seen and often-scorned vehicle loans stretching to 84 months may become more popular in the marketplace as the auto industry tries to hang on to the profits of selling relatively expensive vehicles in the face of the coronavirus crisis. That’s a prediction from J.D. Power as it tracks the pandemic’s effect on auto sales, present, and future. Typically, 72-month auto loans are as long as it gets, but “we expect 84-month loans to become more prevalent,” Tom King, J. D. Power’s chief product officer, says during a webinar on the COVID-19 virus’ impact on the auto industry.
After a weekend of intense lobbying, Canadian new-vehicle dealers were breathing a sigh of relief when Prime Minister Justin Trudeau announced Monday his government’s new coronavirus-related wage subsidy would be tied to lost sales, not employer size. Dealers sent more than 1,000 letters to their MPs over the weekend raising concerns they wouldn’t qualify for the program announced Friday if it was limited to small and mid-size businesses with less than $15 million in capital assets, the Canadian Automobile Dealers Association said. But on Monday, CADA was declaring victory after Trudeau announced Ottawa’s new 75-per-cent wage subsidy would be open to any employer that had lost at least 30 per cent of its sales due to the massive economic shutdown caused by COVID-19. The new rules mean any dealer, even those in large ownership groups, could qualify for assistance, CADA noted. “We will continue to fight on behalf of dealers, to ensure that they are able to stay open for business, employ hard-working Canadians, and continue to serve customers long after the health pandemic is over,” CADA President Tim Reuss vowed in a statement.
The new Canadian Emergency Wage Subsidy would cover any employer of any size up to $847 per employee per week if they could show sales had plunged by at least 30 per cent during the massive economic shutdown prompted by COVID-19, Trudeau said. As previously announced, the benefit would be retroactive to March 15, he said. “We know what businesses are going through. Over the past weeks you’ve had to get creative to keep money coming in and, in some cases, you’ve had to make the difficult decision of letting your employees go,” Trudeau said.
The prime minister warned there will be serious consequences for businesses that attempt to cheat or abuse the system, CADA noted. All businesses that can should, if possible, top up the remaining 25 per cent, Trudeau also said. The prime minister also emphasized the good faith nature of this fast- moving approach, CADA said. The wage subsidy is part of a larger business support program that includes deferred GST/HST, increased liquidity access for small businesses, and a workshare program, CADA noted.
The Canadian Emergency Wage Subsidy replaces a previously announced 10-per-cent wage subsidy that would have been available only to small- and medium-size businesses with less than $15 million in capital assets, a threshold few Canadian car dealers could meet.
Nearly 2 million vehicles are coming off lease over five months in the U.S., and J.D. Power says to expect heated auto-industry efforts to get lessees to re-up. The company’s just-released 2020 U.S. End of Lease Satisfaction Study urges dealers and lenders to work together to retain lease customers as the market heads into a downturn because of the COVID-19 pandemic.
Subscribe to our Automotive Weekly newsletter