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 GM is being advised by Goldman Sachs, while FCA is working with UBS
on the matter, several sources said, with one adding that Morgan
Stanley was also working with GM.
GM's board rebuffed a merger proposal from the Italian-American
carmaker earlier this year and Chief Executive Mary Barra said last
week she had no interest in a combination.
But Barra's rejection has not stopped FCA boss Sergio Marchionne
working on a merger plan, according to the sources. He is lobbying
GM investors in an effort to drag the GM board to the negotiating
table, they said.
GM signed a letter of engagement with Goldman Sachs earlier this
week seeking advice on FCA, one of the sources said.
GM Senior Vice President Tony Cervone did not confirm that his
company was retaining Goldman Sachs or Morgan Stanley specifically
on the FCA merger approach.
When asked about the matter, he said: "It would be inconceivable for
General Motors not to be talking to any number of advisers about
normal business operations, but I'm not going to list the issues one
by one."
Spokesmen at FCA, Goldman Sachs and Morgan Stanley declined to
comment.
Goldman Sachs, which has assisted Fiat on a number of deals in the
past, acted as one of GM's defence advisers during a February proxy
battle.
Meanwhile, FCA is working with Swiss bank UBS on its strategy, while
Fiat's founding Agnelli family, which holds around 30 percent of FCA
via investment vehicle Exor <EXOR.MI>, is being advised by Lazard,
the sources said.
A spokeswoman at UBS confirmed it had an ongoing relationship with
FCA, but declined to comment on the General Motors situation.
Lazard declined to comment.
DOWNTURN FEARS
Marchionne - who turned 63 on Wednesday - has argued that the global
auto industry needs a dramatic consolidation to share prohibitive
capital costs.
Global rivals in the sector face mounting costs to engineer vehicles
that emit little or no carbon dioxide, and can avoid collisions
using complex robotic driving systems.
FCA's move on GM also comes amid concerns that the industry is
heading for a downturn which would hammer company valuations.
"For Marchionne it's now or never," an industry banker said, saying
that industry valuations had reached their peak.
The problem facing Marchionne is that FCA is much smaller than GM,
which has a market value of about $57 billion and annual revenues of
around $156 billion.
FCA, the world's seventh-largest carmaker with a market
capitalisation of $20 billion, reported revenues of 96 billion euros
last year. It has one of the highest debt piles in the industry,
with net industrial debt at 8.6 billion euros.
Much of FCA's market value is tied up in Ferrari, fawhich Marchionne
has often described as a "phenomenal carrot" to investors.
Sources close to FCA said any merger with GM would not include
Ferrari since the Agnelli family wants to retain control of the
luxury unit and go ahead with a listing plan.
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John Elkann, the scion of the Agnelli family who acts as FCA
chairman, also wants to retain a minority interest in a combined
entity with GM, the sources said.
Ferrari was initially set to hit the stock markets in the first half
of 2015, but FCA subsequently pushed the listing back to at least
mid-October.
Industry bankers say FCA needs to hold on to its current equity
value while negotiating a potential deal with GM.
RISK-TAKER
Marchionne, who took over as CEO in 2004 and rescued both Fiat and
Chrysler, is a notorious risk taker.
While a hostile move for GM is seen as a long shot, Marchionne is
trying to lobby investors to support his case that GM and FCA would
be better off merged, the sources said.
The combined entity would be able to spread the high costs of
developing vehicles, including greener and more high-tech cars, the
sources said.
The mechanics of a hostile bid look "beyond ambitious", Bernstein
analyst Max Warburton said in a note, while adding: "Stranger things
have happened, especially in bubbly equity markets."
GM does not have a single controlling shareholder, and its top
investor is Brock Capital Group with an 8.7 percent stake.
Brock Capital is the fiduciary that manages the shares for the
United Auto Workers healthcare trust for retired workers. Analysts
said the U.S. labour union would view a GM-FCA merger with
scepticism because of the potential resulting job losses.
Meanwhile, hedge funds control around 6 percent of the shares.
Based on expectations that shareholders would demand a 35 percent
premium to GM's market capitalisation, FCA would need to pay about
$77 billion in an all-stock transaction in the event of a hostile
bid, the sources said, adding that GM shareholders would likely
demand a substantial payout.
But FCA would be under enormous financial strain if it decided to
pursue a hostile bid, the sources said.
Some bankers argue that Marchionne - widely seen as an aggressive
dealmaker - is unlikely to let that stop him and his chairman,
Elkann, said in May the carmaker would "act with determination" if
it found a target that "made sense".
(Additional reporting by Ben Klayman; Editing by Alexander Smith and
Pravin Char)
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