Get a Car Deal With Fiat Chrysler

Investors seem reluctant to pin much hope on the merger of Fiat Chrysler and its French peer PSA. Yet its potential—and financial terms favorable to the Italian-American company—will become harder to ignore as the deal approaches the finishing line.

Few people doubt that the car industry needs mergers. That is particularly true in Europe, where the top three players had just 53% market share in the first half of the year and regulators are promoting low-margin electric vehicles. Even before the coronavirus struck, the industry consistently failed to make a reasonable return on its vast capital employed.

Fiat Chrysler and PSA, which owns the Peugeot Citroën , Opel and Vauxhall brands, expect to generate at least €3.7 billion ($4.38 billion) worth of cost savings through their merger. Taxed and capitalized, these “synergies” could have a net present value of roughly €15 billion, potentially adding more than 70% to the companies’ combined equity value (excluding payouts due to shareholders before completion). But there isn’t a trace of this potential in their share prices, which have fallen with—and in PSA’s case more than—the wider sector since The Wall Street Journal first reported the talks last October.

Investors’ caution in attributing value to the deal is understandable. They have been burned before, most notoriously when Mercedes-Benz maker Daimler bought Chrysler in 1998. Volkswagen has never translated its scale into superior returns. Closing car factories tends to be extremely political. These are all good reasons why investors prefer to see the fruits of a deal before bidding stock prices up.

Yet this time really is different. The combined company, due to be called “Stellantis,” will be run by PSA’s Carlos Tavares as chief executive and Fiat Chrysler’s John Elkann as chairman. The men share an intense focus on capital allocation. Mr. Tavares has achieved wonders at PSA, not least by buying the former European business of General Motors and integrating its models onto PSA platforms. Adding the underperforming European business of Fiat Chrysler seems like a comparable job.

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