Stellantis is off to a strong start. At least that is what the solid share price performance suggests: +7.6% on its first day of trading on the Paris and Milan exchanges (STLA will start trading on the NYSE today). However, the prospects were not always so rosy. While the courtship between PSA and FCA had already begun around March last year, the news of a potential tie-up between the two were not confirmed until 30 October. By 18 December, the 50/50 combination was official.
Alas, March also marked the start of the COVID-19 crisis that put the entire industry into disarray. The narrative behind the merger was drowned by the gloomy outlook faced by all automakers, leading to share prices jumping off a cliff. A year and a month later, all the ground lost since that official announcement has been recovered, buoyed by the better-than-expected sector recovery (and the Tesla effect on Auto valuations) but also by mounting investor expectations on what the creation of Stellantis would bring to FCA and PSA.
FCA and PSA share prices: back to the starting point
The rationale for the combination was clear since the beginning. As foreseen years ago by previous CEOs such as Fiat’s the late Sergio Marchionne and Renault-Nissan’s Carlos Ghosn, the challenges faced by OEMs in terms of electrification, technology (autonomous driving and the connected car), as well as changes in consumer behaviour regarding car ownership, were bound to push for further consolidation in the industry. By combining two medium-sized OEMs into the fourth largest automaker (in volume terms based on 2019 figures), PSA and FCA are now able to leverage the increased scale and reduce the burden of major investments needed in the coming years in order to face those challenges.
The creation of Stellantis sees PSA shareholders finally gaining significant exposure to the huge and lucrative North American market, where virtually all of FCA’s profits have been generated recently (c.90% of operating income). In FCA’s camp, the group now has access to PSA’s EV platforms and technology, a definite advantage as the former is somewhat late to the electrification party. Also, Fiat’s troubled European operations are set for a revamp, following in the footsteps of PSA and its turnaround under the helm of Carlos Tavares, who now acts as Stellantis’ CEO. With PSA arguably bringing more to the table, it is not a surprise that the company will hold six seats on the board versus FCA’s five and that the merger terms are slightly skewed in PSA shareholders’ favour.
Under Stellantis’ hood, an approximation
Since the group’s organisation is yet to be presented by CEO Carlos Tavares and his team, we have gone through the exercise of making a broad combination of our PSA and FCA’s forecasts using the AlphaValue M&A simulation tool. Then, we removed the expected contribution from Faurecia, which was fully consolidated in PSA’s accounts, and was to be distributed to all Stellantis’ shareholders once the merger was finalised according to the terms of the combination agreement. Overall, this should give us an approximation of what we can find under the hood of the newly-created group.
Consolidated P&L: Stellantis from 2021e; FCA before
Given that the Auto sector is not expected to recover to 2019 levels until 2023, it is no surprise that the 2021e consolidated sales of Stellantis stand at c.10% below the combined revenue of FCA and PSA (minus Faurecia) seen in 2019. This result would be driven by a sales volumes of roughly 7m cars in 2021, a far cry from the combined 8.9m units delivered in 2019 — calling it the fourth largest OEM may prove a bit premature in the case. However, by 2023, volumes should recover to north of 8m units if all goes well.
Carlos Tavares’ to-do list
As the head of Stellantis, Mr Tavares faces a tall order, leading the 400k-strong workforce and coordinating 14(!) brands (outdoing VW Group’s (Reduce, Germany) twelve nameplates) while managing a global footprint — although Europe and the Americas stand as the most important markets. Among the top priorities is the turnaround of Fiat’s European operations, weighed down by sheer production overcapacity and an unconvincing product portfolio, excluding the shiny and new Fiat 500 electric. To address this, Mr Tavares would leverage PSA’s multi-energy CMP platform that underpins the commercially successful Peugeot 208 and 2008 SUV as well as the Opel Corsa and Mokka SUV, all of which count with a fully-electric version. While we would have to wait a couple of years to see the fruits of this integration, this would give a much-needed boost to Fiat’s products in the race to electrification.
Source: Groupe PSA, AlphaValue
The Chinese challenge also stands high on the table of priorities, as both groups have a weak presence, having sold less than 200k vehicles in the country in 2019, a mere blip on the radar in what is the world’s largest auto market, and a key growth driver for the much better established German OEMs. A potential solution could come in the form of a new joint-venture partner. PSA is no stranger to severing ties with a Chinese OEM, as it did in 2019 with Changan Auto. Maybe Dongfeng could be next on the chopping block.
Valuation implications: all about the synergies
Our DCF is built on an expected group operating margin of 5.8% in 2021, rising to 7%, after incorporating annual run-rate synergies of €5bn by 2022. The cost for achieving these synergies would be front-loaded in 2021, and total €4.1bn in 2022. We expect these synergies to be the main driver behind the 28% increase in EPS in 2022.
As for the rest of our assumptions, we estimate capex for the group at c.€10bn in 2021-22, with a capex/sales ratio c.6.0% through the forecast period, rising slightly to 6.5% of sales from 2023 as the portfolio renewal under the newly-combined entity begins to take shape, in addition to a more aggressive roll-out of EVs.
Regarding our NAV/SOTP valuation, we have simply combined our previous forecasts of the SOTP from PSA and FCA, keeping the business units under each group separate, and incorporated the present value of synergies over the forecasted period minus the integration costs that we expect to be incurred over 2021-22. This will be modified once the new group structure is presented by Mr Tavares and his team.
Shooting for the stars
Now that Stellantis sees the light of day, the coming months will be crucial to meet investors’ expectations for this ambitious combination, which have been set high as judged by the rising share prices of both companies leading up to the combination and the successful debut of STLA on the Milan and Paris exchanges.
We hold the view that the merger should greatly benefit both companies on the basis of synergies, shared platforms, a more diversified geographical footprint, and a stronger competitive position, which will be crucial to confront the challenges (and costs) of electrification. Our Buy recommendation sees the potential of a star-filled future.