The real fake acquisition of FCA by PSA

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Following an article in Automotive News Europe, we read that the merger between equals between PSA and FCA was in fact an acquisition of the latter by the former. On closer inspection, this theory is very fragile and, although the review of the deal negotiated in August was a way of making PSA's point of view prevail, the fiction of a merger between equals is for the moment safe.
 
Automotive News Europe's correspondent in Italy, Andrea Malan, has had some success in tracking down in the documents published on the PSA and FCA websites - and, in particular, in the "prospectus" announcing how Stellantis is to be formed - the paragraph which states that, for accounting reasons, it is, even in the case of a merger between equals, necessary to designate a buyer and an acquirer. The article suggests that the fact that, in order to meet this requirement, the choice was made to consider that it was PSA that acquired FCA and not the other way round is not accidental. 
In fact, in the draft agreement of 27 October, available on the PSA website in three languages, it reads (paragraph 7.2, p.45) ): "For the purposes of the corporate financial statements of FCA, prepared for Dutch accounting purposes (the "Dutch Corporate Financial Statements"), the Merger will be accounted for as a reverse acquisition in accordance with the recognition and measurement criteria applied in the consolidated financial statements of FCA, i.e. in accordance with IFRS3 Business Combinations ("IFRS 3"), pursuant to which PSA is considered the acquirer for accounting purposes".
 
In the "Report of the Merger Auditor on the value of the contributions to be made by Peugeot SA to FCA N.V." by Finexsi, it is stated that 
"As stated in Article 7.2 of the Draft Merger Agreement, the parties have considered that, from an accounting point of view and in the context of IFRS, PSA should be considered as the acquirer. Consequently, and in accordance with this analysis, the contribution values constituted by the assets and liabilities of PSA retained in the context of the Merger that is the subject of the Draft Merger Agreement are the book values, it being specified that it will be the assets and liabilities of FCA that will be revalued at their fair value in the parent company and consolidated financial statements of the Combined Company following completion of the Merger".
 
This could be confusing, but what should be understood is that in the context of a cross-border merger where it is decided that the new entity will have its registered office where one of the entities already had one, it is simpler to keep the existing entity and rely on the accounting that it produces and incorporate the assets and liabilities of the other at their book value.
For example, before being renamed Stellantis, FCA (acquired entity) will absorb PSA (acquirer) for accounting purposes and it will thus be possible to retain as assets and liabilities of FCA their "fair values" whereas, for PSA, the contribution values will be the book values. The purpose of the Finexsi report is precisely to verify that the values used in the project are fair: 
"The net assets contributed by PEUGEOT S.A. to FIAT CHRYSLER AUTOMOBILES N.V. were provisionally determined in the draft merger agreement signed by the representatives of the companies concerned on 27 October 2020. It is up to us to express a conclusion on the fact that the value of the contributions is not overvalued".
 
It is basically an exercise that validates all the work done by the PSA and FCA teams and their "advisors" in the months preceding the deal. The author writes: "we have taken note of the valuation work carried out by the banks advising the parties on the transaction, for which we have assessed the multi-criteria approaches used to establish the relative value of PSA in the context of the assessment of the exchange ratio used to remunerate the contributions".
More specifically, it appears that the value used for the net assets of PSA is that corresponding to the situation at 30 June to which a 10% discount is applied. This value ('17,625.76 million) appears to be lower than the PSA valuations based on stock market prices prior to the announcement but higher than the PSA valuations resulting from recent stock market data.
 
While having said that "the reference to PSA's consolidated net assets is not usually representative of its real value, and only partially reflects the group's capacity to generate future results", the report concludes "we are of the opinion that the value retained of the net assets contributed, provisionally amounting to 17,625.76 million euros to the benefit of FCA, is not overvalued".
 
Since his job is basically to show that the merger between equals such as it will be organised in fine within the framework of the revised agreement this summer is indeed still a merger between equals, he validates the options taken. It is a way of saying that PSA and its advisers did well to push Elkann in August to reconsider its intentions to distribute 5.5 billion euros in exceptional dividends, and to settle for 2.9 in exchange for a distribution of the shares in Faurecia held by PSA after the merger to all the shareholders of Stellantis (rather than a distribution, before the merger, to the shareholders of PSA alone) and a hypothetical distribution by both of them of 500 million exceptional dividends.
 
It is therefore not entirely false to say that the renegotiation of FCA's dividends (from the initial 5.5 billion to the 2.9 billion that will finally be paid) validated by both parties will allow Stellantis to be 2.6 billion euros richer in 2021 (1.6 if both companies finally decide to pay both 500 million exceptional dividends at the end of the financial year).
This tends to confirm that, like the composition of the board of directors, the evolution of the deal since the summer indicates that the balance tends to tip towards PSA. The fact that, from an accounting point of view, PSA is the acquirer has little to do with this. 
 
Bernard Jullien, University of Bordeaux
 
 
 
 

The weekly column by Bernard Jullien is also on www.autoactu.com.

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