oShareholders of Fiat Chrysler Automotive N.V. (FCA) and Peugeot S.A. (PSA) approved the merger of their respective businesses. We expect the merger will be completed on Jan. 16, 2021, at which point PSA will merge into FCA, and FCA will be renamed Stellantis N.V.
oWe consider that the combined group will benefit from increased scale, improved business and geographic diversity, and a strong capital structure, with an estimated net cash position exceeding EUR10 billion at closing and solid free cash flow generation prospects.
oThis is only partly offset by uncertain market conditions at least in the first half of 2021, and risks linked to achieving cost synergies, and electrification of the product portfolio.
oWe are therefore raising our long- and short-term issuer credit ratings on FCA to 'BBB-/A-3' from 'BB+/B', and removing them from CreditWatch with positive implications, where we placed them in November 2019.
oThe stable outlook balances our belief that the group will improve profitability and cash flow generation in 2021-2022, after an extraordinarily challenging but well-managed 2020, and risks linked to executing this transformative merger.
MILAN (S&P Global Ratings) --S&P Global Ratings today took the rating actions listed above. The combined entity will have a solid balance sheet, good free cash flow prospects and large liquidity buffer.
In our base case, Stellantis' net cash position will hover at about EUR14 billion on an unadjusted basis. This will provide the group with a considerable buffer to market conditions, which remain exposed to COVID-19-linked mobility restriction risks during the first half of 2021, and could suffer from the gradual reduction of government support. Liquidity, including net cash and available committed lines, is likely to represent about 30% of revenue, which we deem high by global industry standards. We have little visibility on Stellantis' financial policy at this stage, but assume the group will aim to maintain a strong balance sheet. We assume the group will distribute ordinary dividends from 2021 due to the comfortable liquidity buffer and solid free cash flow generation prospects, which we forecast at about 2%-3% of sales in 2021-2022. We expect free cash flow generation to be more resilient going forward given the combined group's broader geographic and product diversification. As a result, we have revised upward our financial profile assessment for the group.
The group will benefit from increased scale as a result of the merger with former French competitor PSA.
Stellantis will rank among the largest light vehicle original equipment manufacturers (OEM) globally by volume, after Toyota and Volkswagen (we don't consider Renault-Nissan-Mitsubishi a singular group). We see scale as a key advantage with regard to monetizing the massive investments in electrification, digitization, and new technologies to develop autonomous driving. At the same time, we note that the full benefits from its larger scale will materialize only when the group's brands converge on fewer platforms. Because convergence is tied to products' lifecycles, this will likely take a while.
The merger will also support FCA's profitability, market position, and diversification.
Partnering with PSA, the most profitable volume light vehicle constructor in Europe, will also improve the profitability of FCA's European operations, which have been struggling. We expect FCA will also reap benefits in terms of manufacturing and process re-engineering as well as purchasing and selling, general, and administrative efficiencies. We expect the combined group's synergies to be highest in Europe, considering the overlap in manufacturing footprints. In addition, in Europe the new group will inherit the strong market position of PSA and FCA in light commercial vehicles.
Another advantage of the merger comes from the better diversification of FCA's earnings pool, which currently relies heavily on the profitable but highly competitive U.S. market. Despite no immediate need to hedge its carbon emissions position to satisfy regulations in Europe, the merger gives FCA access to PSA's electrified powertrains, technology, and vertical business model, without which we believe the group's competitiveness would have suffered in Europe in the next years.
We see execution risks, given the transformative nature of the transaction.
Despite the experience of FCA (and PSA) with integrations, we believe this transaction presents a high degree of complexity. Specifically, the convergence of products on common platforms will be a key milestone in achieving savings on procurement and unit production costs. Currently, we have limited visibility on the strategic integration steps, and believe it could be challenging, for example, to find commonality between the Jeep brand and PSA's products. Additionally, while we expect FCA will greatly benefit from PSA's electric technology and powertrains, transitioning the new flagship Fiat 500 BEV to the new dedicated EVMP platform will take time considering the advanced stage of product development.
Focusing on the merger in Europe could result in missed opportunities in China, and a weaker competitive position.
Unlike the U.S. and Europe, we believe China may outperform our market projections in the next two years, which presents opportunities for auto OEMs and suppliers with solid positions in the market and clear electrification roadmaps. The integration in Europe will likely hamper Stellantis' ability to leverage opportunities in China. Given that the group's closest competitors, Volkswagen and Toyota, are fighting to consolidate their market share gains, inaction in the short term could make it difficult for the group to rebuild a position in the world's largest single market.
Stellantis' lack of a developed captive finance business in one of its key markets remains a challenge.
We consider a capillar captive finance business key for the group's successful transition to electric mobility, given that higher vehicle prices will likely result in stronger demand for funding and leasing. 2020 underlined how supportive proprietary captive finance business can be in sudden downturns, mainly thanks to its recurring cash generation. In Europe, Stellantis' captive finance business, run via joint ventures with banking partners, is organized by family of brands, and we assume that larger volumes and the group's stronger investment-grade status may open new options around captive business models for the group. In the U.S., however, FCA does not have a captive finance business, and this remains the main distinguishing factor versus established U.S. and other global competitors that constrains the group's competitive advantage.
The stable outlook balances our belief that the group will improve profitability and cash flow generation in 2021-2022, after an extraordinarily challenging but well-managed 2020, and risks linked to executing this transformative merger.
We could downgrade the group if its industrial free cash flow generation fell materially below 2% of auto revenue, which could happen if market conditions were materially weaker than we currently expect. Furthermore, although not likely, we could take a negative rating action if an aggressive financial policy resulted in large dividend distributions that eroded Stellantis' comfortable financial buffer.
Any upgrade would likely result from strengthening of Stellantis' business risk profile. We believe this could happen if the group:
oFlawlessly executes the merger integration;
oSuccessfully rolls out its electrification roadmap;
oDemonstrates a turnaround of its luxury and premium brands; and
oAchieves and maintains industrial free cash flow generation of 4% of auto revenue and maintains adjusted EBITDA margins of about 8%-10%.
Related Criteria
oGeneral Criteria: Group Rating Methodology, July 1, 2019
oCriteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
oGeneral Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
oCriteria | Corporates | General: Methodology: The Impact Of Captive Finance Operations On Nonfinancial Corporate Issuers, Dec. 14, 2015
oCriteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
oCriteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
oGeneral Criteria: Methodology: Industry Risk, Nov. 19, 2013
oGeneral Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
oGeneral Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
oGeneral Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Related Research
oFiat Chrysler Automobiles N.V. Placed On CreditWatch Positive On Merger With Peugeot S.A., Nov. 6, 2019
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