LDN - Business

Fiat Chrysler's merger options dwindle as Volkswagen rejects overtures

[March 08, 2017] By Andreas Cremer and Agnieszka Flak

GENEVA (Reuters) - Fiat Chrysler boss Sergio Marchionne's attempts to find a partner were frustrated for a second time in as many days on Wednesday, as Volkswagen (VW) joined General Motors (GM) in dismissing any interest in talks with their smaller rival.

Marchionne said on Tuesday that European market leader VW would be hardest hit by PSA Group's purchase of Opel, which will create a stronger European No. 2, and the pressure could prompt VW to sit down with FCA.

But VW chief Matthias Mueller was quick to rebuff the overtures, saying his company had enough on its plate already as it battles to recover from a diesel emissions scandal.

"We are not ready for talks about anything ... we have other problems," he told Reuters on the fringes of the Geneva auto show on Wednesday. "I haven't seen Marchionne for months."

Marchionne has long advocated car industry mergers to share the costs of making cleaner and more technologically advanced vehicles and on Tuesday stressed deals were as vital as ever.

"You need to achieve scale or we will end up delivering an incredibly poor return and margins on this business. We need to fix this," he said, referring to the wider auto industry.

The PSA-Opel deal leaves FCA in an increasingly difficult position in Europe. The indebted group has a European market share of only about 7 percent, its operating margin of 2.5 percent lags most rivals, as does its spending on cleaner and more autonomous cars.

Mueller's rejection follows a similar snub from GM <GM.N>, after Marchionne said the U.S. company remained his favorite merger candidate despite its decision to exit Europe by selling Opel and having rebuffed FCA's approaches several times already.

"We weren't interested before and we're even less interested now," GM President Dan Ammann told reporters in Geneva.

A combination of VW and FCA could in theory create a European market leader with a share of around 30 percent, give VW a strong foothold in North America through FCA's Chrysler operations and fix FCA's lack of scale in Asia. But the combination could also mean thousands of job losses that unions and politicians from Italy to Germany would strongly oppose.

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Volkswagen CEO Matthias Mueller speaks during Volkswagen event ahead of the 87th International Motor Show at Palexpo in Geneva, Switzerland, March 6, 2017. REUTERS/Arnd Wiegmann

Mueller also stressed scale was not a priority for VW.

"In my opinion, size does not matter," he said. "I have always said volume is not our sole goal. We want to be a successful manufacturer in every way."

DIESELGATE WOES

Marchionne is courting VW at the worst possible time.

The German company is at the start of a multi-billion-euro transformation to embrace electric cars and automated driving as it struggles to overcome its emissions scandal.

While grappling with billions of costs for fines, buy-backs and other charges in the United States, VW is also facing a mounting challenges from consumer groups seeking compensation.

The group is battling with its powerful labor unions too about cost cuts to fund its new strategy.

Since being rejected by GM, Marchionne has focused on eliminating debt and shifting production towards higher-margin vehicles, including SUVs, to become a more attractive merger partner in future. But his options appear to be dwindling.

"In western countries we believe that Volkswagen remains the main candidate for M&A, but after dieselgate, which likely stopped everything for a while, the top candidates for an FCA deal moved to the East (Koreans or Chinese), with all the risks on timing and political consequences that they would bring," said Angelo Meda, head of equities at Banor SIM.

Some analysts also question why anyone would buy FCA now when the price could be set to fall, given the North American market - where it makes most of its profits - may be peaking.

(Additional reporting by Ilona Wissenbach in Geneva and Danilo Masoni in Milan; Editing by Mark Potter)

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