STLA Stellantis NV

By Nick Kostov and Ben Dummett 

Peugeot maker PSA Group and rival Fiat Chrysler Automobiles NV have agreed a binding merger agreement that includes sweeteners to make the trans-Atlantic tie-up more attractive to U.S. regulators and PSA shareholders.

The two companies said Wednesday they had signed a combination agreement fixing the financial terms of the deal and the corporate governance structure of the combined group. The move marks an important step in solidifying a merger that was announced in October. The tie-up aims to create a $50 billion auto giant that would rank among the world's largest car companies by sales.

The deal comes at a time of mounting cost pressures in the global car business, with auto companies investing billions in new technologies, such as electric cars, as demand for cars and trucks in the top auto markets weakens.

Among the terms added over the past several weeks were agreements that China's state-run Dongfeng Motor Group Co. would sell part of its 12.2% stake in PSA back to the French car maker and that Fiat Chrysler would spin off its Comau division at least until after the deal.

The Wall Street Journal on Tuesday reported that both companies' boards had backed the agreement and the new deal terms added in recent weeks.

The transaction -- expected to close in 12 to 15 months -- will create a car maker selling 8.7 million vehicles a year with revenues of nearly EUR170 billion ($189 billion), the companies said. It won't result in any plant closures and will lead to annual cost savings of some EUR3.7 billion euros a year, they added. The merged company's name is so far undecided.

"The challenges of our industry are really, really significant," PSA Chief Executive Carlos Tavares said. "We are doing this because we believe that we will be stronger to face the future challenges of our industry than alone."

Dongfeng's decision to reduce its stake in PSA is designed to help the deal gain approval from the Committee on Foreign Investment in the U.S., which is likely to review the merger proposal at a time of trade tensions between the U.S. and China, the people said. Dongfeng would end up with a roughly 4.5% stake in the newly combined auto company and won't be entitled to a board seat, they said.

The two sides also have changed the deal so Fiat Chrysler's Comau division, a maker of robotics technology used in vehicle manufacturing, will be spun off after the deal completes, rather than before as previously planned. That will allow both PSA and Fiat Chrysler shareholders to benefit from any sale of the Comau division, which is valued by Jefferies at some EUR250 million ($279 million).

Both Fiat Chrysler and PSA shareholders must approve the deal through a vote, likely to occur next fall. The companies said Wednesday that the four largest shareholders in the new entity had all pledged to vote in favor of the deal. Once the merger agreement is signed, the companies will next need approval from both U.S. and European regulators to move forward. They will also need the backing of various banking authorities, since the companies own financing operations across the globe.

The original proposal outlined terms in which Fiat Chrysler will pay a special dividend of EUR5.5 billion to its shareholders. By comparison, PSA will distribute to its shareholders the company's 46% stake in auto-parts supplier Faurecia, which is valued at EUR3 billion. The value difference raised concerns among PSA investors that they weren't getting as good a deal as Fiat Chrysler shareholders.

In vetting the merger proposal, PSA lawyers reviewed a recent civil lawsuit filed by U.S. rival General Motors Co., accusing Fiat Chrysler of paying bribes to union officials in the U.S. to win it a more favorable labor-cost advantage. The attorneys, however, agreed with Fiat Chrysler's assessment that the lawsuit was meritless and ultimately decided it wasn't a major hurdle to the deal, say people close to French car maker.

"Hopefully we will clear that very quickly and if not we will vigorously defend it into the future," Fiat Chrysler's CEO Mike Manley said.

U.S. regulators would be likely to latch onto Dongfeng's ownership stake in PSA and its board seat as a red flag, when reviewing the deal, especially given the Trump administration's focus on the auto industry and Chinese intellectual-property theft, said John Kabealo, a lawyer whose practice focuses on business-related national security issues.

The Treasury Department, which handles press inquiries for the Committee on Foreign Investment in the U.S., declined to comment, saying it doesn't provide information on specific merger reviews or whether a company has filed for one, a spokeswoman said.

If completed, the merger will create the world's fourth-largest auto maker by number of vehicles sold, uniting the owner of brands such as Dodge, Ram, Jeep and Alfa Romeo with a stable of brands that includes Peugeot, Citroën, Opel and Vauxhall. The new company will produce almost as many cars in Europe as Volkswagen AG, the continent's largest car maker, and will have a large presence in the U.S. and South America.

The two car makers previously said that John Elkann, Fiat Chrysler's chairman, will become chairman of the newly merged company, while PSA Chief Executive Mr. Tavares will be CEO with an initial five-year term.

Ben Foldy contributed to this article.

Write to Nick Kostov at Nick.Kostov@wsj.com and Ben Dummett at ben.dummett@wsj.com

(END) Dow Jones Newswires

December 18, 2019 04:17 ET (09:17 GMT)

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