General Motors Co.’s surprise racketeering lawsuit against Fiat Chrysler Automobiles NV has raised the risks for the Italian-American company’s plan to combine with Peugeot-maker PSA Group of France.
The suit filed in federal court in the U.S. alleges Fiat Chrysler inflicted billions of dollars in damages by bribing United Auto Workers’ brass for competitive advantages that the union denied to GM. The allegations in a years-long corruption scheme have already landed car executives and labor leaders in jail.
Fiat Chrysler has called the allegations “meritless” and said it assumed GM was trying to undermine the Peugeot deal, which was unveiled last month and expected to be signed in the coming weeks. GM’s general counsel Craig Glidden told reporters the tie-up has no bearing on GM’s complaint.
Fiat Chrysler Chairman John Elkann said Thursday he’s confident the company will sign a binding agreement before the end of the year. A representative of PSA declined to comment.
Following are some questions raised by the lawsuit:
Has PSA gained bargaining power?
The French manufacturer may use the lawsuit to bargain down the price of the combination, according to Commerzbank analyst Demian Flowers. Still, he cautioned, PSA CEO Carlos Tavares’s possible use of the litigation is difficult to evaluate without knowing whether GM’s claims are credible and likely to result in damages.
Tavares honed his negotiating skills with the purchase of GM’s Opel and Vauxhall brands in 2018 for 1.3 billion euros ($1.44 billion). Since the Fiat deal was announced, intense talks have continued between the two companies, intent on getting a signed agreement.
In the meantime, analysts have questioned the value of the deal for PSA. The French carmaker’s shareholders are “taking all the risks,” Deutsche Bank’s Gaetan Toulemonde wrote earlier this week. RBC Capital Markets has said PSA is overpaying, while Citigroup called the proposal heavily skewed in Fiat Chrysler’s favor.
Investors have so far shrugged off the risks or rewards of the lawsuit for the French automaker. PSA shares were trading 0.7% higher at 14:30 p.m. in Paris while FCA shares were down 2.2% in Milan.
Could the lawsuit whip up a political backlash?
The suit describes Chrysler Group LLC — purchased by Fiat in 2014 — as an “iconic U.S. auto company.” Shortly after the acquisition, GM alleges, Fiat “betrayed our government’s and the U.S. auto industry’s trust and embarked on a systemic and near decade-long conspiracy to bribe senior union officials to corrupt the collective bargaining process and labor relations.”
GM’s Glidden went further. “Something’s wrong when a foreign company can come to the U.S. and say it will abide by law, but then systematically violate those laws,” he told reporters Wednesday.
“If GM ends up being able to ignite political interests in this issue, then you have a risk factor,” Flowers said.
Could U.S. regulators scuttle any Fiat-Peugeot deal?
U.S. economic adviser Larry Kudlow has already warned that the Trump administration intends to review the planned Franco-Italian merger. He pointed to the fact that PSA counts China’s Dongfeng among its investors, meaning the combined entity would have a Chinese shareholder.
“We have to make sure that whatever China business developments occur do not occur to the detriment of not only of our economy but our own national security,” he told Bloomberg TV.
While analysts haven’t necessarily seen China as a dealbreaker, the Trump administration has shown its willingness to take aggressive policies on trade to protect the domestic car industry. Trump last week said he will decide fairly soon on whether to impose tariffs on imports of European automobiles.
Do other U.S. lawsuits have any bearing?
GM hasn’t stated the amount of any damages it could seek against Fiat Chrysler, but U.S. litigation and regulatory fines are viewed from the European vantage point as a potentially costly endeavor. Two German examples bear out their fears.
Auto giant Volkswagen AG has yet to see the end of the fallout of the U.S. probe into its diesel cars that first came to light in September 2015. The financial toll has reached 30 billion euros in fines and other expenses and led to consumer lawsuits and criminal cases on both sides of the Atlantic.
Drugmaker Bayer AG’s headache over weedkiller Roundup would certainty provide reason to pause for deal makers. Chief Executive Officer Werner Baumann staked his credibility on last year’s $63 billion takeover of the product’s producer, Monsanto Co. There are now more than 42,000 U.S. plaintiffs suing over Roundup’s alleged cancer-causing properties and analysts estimate a settlement could cost more than $10 billion.
On Thursday, JPMorgan analysts estimated that GM is likely to seek at least $6 billion in damages, with the extreme scenario being as much as $15 billion. Based on the suit, they estimate GM has maintained roughly 50,000 workers on average over the past eight years. The trial could be years away and in case of a settlement, amounts paid could be substantially less than originally sought, the analysts cautioned.
— Ania Nussbaum (Bloomberg)