FCA, PSA seek to boost cash before merger

With their sales decimated by the coronavirus outbreak, Fiat Chrysler Automobiles and PSA Group have postponed their shareholder meetings and are looking at ways to boost cash reserves ahead of their planned merger.

The two automakers have turned to their banks to secure much-needed cash, and FCA is considering debt guarantees that the Italian government approved on Monday to support local companies, a source with knowledge of the matter told Reuters.

FCA, whose legal headquarters is in the Netherlands but operates factories in Italy, could qualify for the government program, which offers more than 400 billion euros ($433 million) worth of liquidity and bank loans to companies hit by the pandemic, the source said, adding that no decision had been made.

A spokesman for FCA declined to comment.

In December, PSA and FCA signed a memorandum of understanding that would create the world's fourth-largest carmaker, with shareholders of each group holding 50 percent in the new entity.

The crisis set off by the virus has virtually erased demand for new vehicles and disrupted supply chains, pushing automakers to temporarily halt most production.

In late March, FCA secured a credit line worth 3.5 billion euros ($3.8 billion), with an initial 12-month term that can be extended by six months. This added to existing credit facilities worth 7.7 billion euros ($8.4 billion).

However, FCA would need to cut its ordinary dividend if it decides to pursue state aid from Italy. The emergency decree says companies looking to apply for Italy-backed loans must refrain from approving dividend payments for a year.

FCA's decision to postpone the shareholders' meeting to late June has analysts speculating that its ordinary dividend worth 1.1 billion euros ($1.2 billion) could be canceled or postponed.

"While the merger process is proceeding, the postponement of the AGM will raise markets' concerns of a potential cancellation of the ordinary dividend," said Monica Bosio, an analyst at Intesa Sanpaolo.

Martino De Ambroggi, an analyst at Equida, said that the most likely outcome is that both FCA and PSA cancel or postpone their ordinary dividends.

PSA, which proposed a similar 1.1 billion euro dividend, also decided to postpone its annual shareholders' meeting, to June 25. But the automaker is not expected to tap state funding, a source close to the company said.

The French automaker, which is led by CEO Carlos Tavares, said on Monday that it had agreed to new credit lines worth about 3 billion euros ($3.6 billion). It is sitting on undrawn credit facilities worth about 3 billion euros.

FCA’s share price has fallen around 45 percent since late February when the virus started spreading in northern Italy. PSA's stock is down 32 percent.

As part of the merger agreement, FCA is set to pay a 5.5 billion-euro ($6 billion) special dividend to its investors. Bankers and analysts have questioned FCA's ability to pay such a windfall at a time when companies are looking to preserve cash.

A source close to the deal said that while both parties were still committed to the tie-up, they needed to see how the crisis evolved before deciding whether to renegotiate merger terms.

Analysts at Jefferies have said the merger is key to the two firms' long-term competitiveness but that some adjustments are "inevitable." They pointed to the special dividend, which is expected to be paid in early 2021, just before the deal closes.

A study by Alix Partners predicts that global auto sales could fall by 22 percent to 27 percent this year, a decline of 19 to 24 million fewer vehicles.

This means global automakers would be below break-even, losing more than 100 billion euros ($108.7 billion) in cash flow globally, the study said, adding that for every month of idled production in Europe, automakers would lose 7 billion euros ($7.6 billion) of cash flow.