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Eyes on Fiat Chrysler's Canadian plants as company merges with Peugeot to create $47-billion auto giant – Financial Post

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PSA Group and Fiat Chrysler Automobiles NV will combine to create the world’s fourth-biggest carmaker, as the manufacturers prepare to shoulder the costly investments in new technologies transforming the industry such as automation and electrification.

In the biggest auto tie-up since Daimler’s ill-fated purchase of Chrysler in 1998, the French and Italo-American carmakers will each own half of the enlarged business with combined annual sales of 8.7 million vehicles.

The all-stock transaction brings together two carmaking dynasties — the billionaire Agnelli clan of Italy and the Peugeots of France — and will forge a regional powerhouse to rival Germany’s Volkswagen AG with a market value of about US$47 billion, surpassing Ford Motor Co.

Executives promised not to close any plants in the merger even though the new company aims to extract 3.7 billion euros in annual synergies related to platform and purchasing efficiencies. FCA currently operates two assembly plants in Ontario where it manufactures nearly one quarter of all vehicles made in Canada.

“In the merger there will be no affect on production in Ontario,” FCA chief executive Mike Manley said on a call with reporters Wednesday.

Earlier this year, FCA announced plans to eliminate a third shift and 1,500 jobs at its Windsor, Ont., plant where 6,000 employees build the Chrysler Pacifica, Chrysler Pacifica Hybrid, Chrysler Voyager and Dodge Grand Caravan.

It has since extended the shift until the end of the first quarter in 2020, and will continue to review the feasibility of maintaining the shift, a spokesperson said in an email. It’s too early to comment on whether that extra capacity — if it opens up — could be used to build PSA vehicles in North America, the spokesperson said.

No cuts have been proposed at FCA’s Brampton, Ont., plant where 3,400 workers build the Chrysler 300, Dodge Charger and Dodge Challenger.

While the combined company said its manufacturing footprint will remain stable for now, the executives touted the synergies from sharing technologies and platforms across brands.

The new company will be run by PSA Chief Executive Officer Carlos Tavares, with Fiat Chairman John Elkann holding the same role.

The transaction will take as long as 15 months to complete, pending approvals by shareholders of both companies and by regulators, the carmakers estimated.

Like executives across the industry, Tavares and Elkann are responding to growing pressure to pool resources for product development, manufacturing and purchasing in the face of trade wars and an expensive shift toward electric and self-driving technology.

“The challenges of our industry are really, really significant,” Tavares, 61, said on the call with reporters. “The green deal, autonomous vehicles, connectivity and all those topics need significant resources, strengths, skills and expertise.”

“The technological revolution we are embracing requires a more innovative response than anything we have done before,” Elkann, 43, said in a letter to staff.

In an era when size is becoming ever more important, the deal will turn the two mid-sized carmakers into a global heavyweight, with a stable of popular brands and annual vehicle sales surpassing General Motors Co. The combination will give Peugeot-maker PSA a long-sought presence in North America and should help Fiat gain ground in developing low-emission technology, where it’s lagged rivals.

Mark Nantais, president of the Canadian Vehicle Manufacturers’ Association, said the deal reflects where the auto industry is going and where it needs to go given how expensive it is to develop new technologies.

“That is so capital intensive and there’s only so much money to go around,” Nantais said. “They have to look for partners, they have to look for synergies in order to basically be prepared for the future.”

As for future manufacturing decisions, Nantais expects the companies to choose markets where it can produce more profitably. While Canada has a skilled labour force, infrastructure and the benefit of the new Nafta deal, it also has higher costs for inputs such as electricity, Nantais said.

“We’re still one of the highest cost jurisdictions to produce,” he said.

When it comes to where to locate production and management, Tavares indicted the company will stick to where the brands have roots and manage through regional headquarters.

“The brands carry the passion, the brands carry the history, the brands carry the emotions. This is why we considered that the brands will stay in their countries of origin,” he said. “Italian brands will stay in Italy, French brands will stay in France, American brands will stay in the U.S., and German brands will stay in Germany.”

Yet the new company will face many challenges. It will still be heavily reliant on Europe’s sluggish and saturated auto market, and poorly positioned in China, the world’s largest country for car sales.

The challenges will be manifold, from improving Fiat’s struggling European operations to meeting tough rules on emissions that kick in next year in the region as well as an unprecedented policy known as the green deal demanding an even tougher clampdown on carbon. Tavares, known as a hard-nosed cost-cutter, will also have to navigate the political crosscurrents in France, Italy and the U.S., where the automakers have deep national roots.

He has tackled tough jobs before, leading the French carmaker back from the brink after taking over in 2014, and reviving the loss-making Opel brand after acquiring it from GM two years ago.

“We believe further synergies above the modest 3.7 billion euros announced will be required to justify the combination going forward, which Tavares’ track record makes likely,” Bloomberg Intelligence analyst Michael Dean said in a note.

The deal with Fiat Chrysler marks a reversal of fortune for the 61-year-old executive, who was forced into a bystander role earlier this year when Elkann approached Renault SA, PSA’s French rival. That merger fell apart in early June after Renault’s Japanese partner, Nissan Motor Co., declined to back it.

China’s Dongfeng Motor Corp., which owns 12 per cent of PSA, will see its stake in the combined company decline to 4.5 per cent as a result of the deal and the sale of a portion of its holding to the French carmaker.

Dongfeng’s stake in PSA has attracted attention because of the possibility it could interfere with U.S. regulatory approval. U.S. economic adviser Larry Kudlow said last month the Trump administration would review the proposed merger because the deal would give the Chinese carmaker a stake in the combined company.

Tavares, on the call, said the companies don’t expect any significant issues from the antitrust regulators.

Fiat CEO Manley dismissed concerns over legal and tax issues that arose in recent weeks. GM in November accused Fiat Chrysler of bribing a union in the U.S. for more favourable terms. Manley, speaking with reporters, called the allegation meritless.

Separately, Italian tax authorities have claimed that Fiat owes the government a hefty sum after underestimating Chrysler’s value following its purchase several years ago. Manley reiterated that the case would have no material impact, and said both issues were reviewed during due diligence with PSA.

Manley, 55, who took over at Fiat last year after the sudden death of industry legend Sergio Marchionne, “will be there alongside” Tavares at the combined group, Elkann said in a letter to employees. He didn’t specify what Manley’s role would be.

Before the closing, Fiat will distribute to its shareholders a special dividend of 5.5 billion euros while PSA will distribute its 46 per cent stake in car-parts maker Faurecia SE to its own investors.

The spinoff or sale of Fiat’s robotics arm Comau slated for the benefit of the Italian company’s shareholders has been modified since October. Now, the planned separation will occur after the closing, and shareholders of the combined company will benefit.

Bloomberg.com

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Tourmaline to expand in Montney with C$1.1 billion deal for Black Swan

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Canada‘s Tourmaline Oil Corp said on Friday it would buy privately owned Black Swan Energy Ltd in a C$1.1 billion ($908.79 million) deal, as the oil and gas producer looks to expand in the Montney region, one of North America’s top shale plays.

Canada‘s Montney, which straddles Alberta and British Columbia, has seen a wave of consolidation as companies buckled under collapsing oil prices amid the COVID-19 pandemic.

Tourmaline said the deal represents a key part of its ongoing North Montney consolidation strategy and the company sees the area as a key sub-basin for supplying Canadian liquefied natural gas.

The company in April acquired 50% of Saguaro Resources Ltd’s assets in the Laprise-Conroy North Montney play for $205 million and entered into a joint-venture agreement to develop these assets.

Analysts at brokerage ATB Capital Markets called the Black Swan assets a “hand in glove” fit with its recent acquisitions.

Tourmaline stock rose 4.5% to C$32.1.

The deal value consists of 26 million Tourmaline shares and a net debt of up to $350 million, including deal costs.

Tourmaline will acquire an expected average production capacity of over 50,000 boepd when the deal closes, likely in the second half of July.

The company, which also raised its dividend by 1 Canadian cent per share, expects the Black Swan assets to generate free cash flow of $150 million to $200 million in 2022 and beyond.

The Canadian energy sector has seen a flurry of deals with companies expecting to benefit from the rebound in oil prices as global fuel demand picks up.

ARC Resources Ltd in April bought Seven Generations Energy Ltd for C$2.7 billion to create Montney’s largest oil and gas producer.

($1 = 1.2104 Canadian dollars)

 

(Reporting by Rithika Krishna in Bengaluru; Editing by Vinay Dwivedi)

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Exxon losing veteran oil traders recruited to beef up profit

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Exxon Mobil Corp has lost two top crude oil traders from its U.S. energy trading group, according to people familiar with the matter, in a continued exodus from the group.

Exxon last year reversed course on a major expansion of its oil and petroleum products trading as fuel demand tumbled during the pandemic. It suffered a $22.4 billion loss in 2020 from its oil production and refining businesses, leading to deep cost cuts across the business.

Veteran oil traders Michael Paradise and Adam Buller, both of whom joined the company in 2019 after lengthy careers elsewhere, resigned last week, the people said. Paul Butcher, an Exxon trader in Britain, plans to leave in September, another person familiar with the operation said.

Butcher was recruited by Exxon in 2018 to advise it on North Sea oil markets and on accounting for trading transactions. He earlier worked for BP Plc, Glencore Plc and Vitol SA.

Exxon declined to comment on the departures, citing personnel matters.

“We’re pleased with our progress over the past couple of years to grow our team and capabilities,” said spokesman Casey Norton. Exxon’s scale and reach “give our trading teams a broad footprint and unique knowledge and insights” that can generate value for shareholders.

Paradise was a highly regarded crude oil trader who joined Exxon from Noble Group and earlier was director of crude oil trading at Citigroup Inc and BNP Paribas. Buller joined Exxon in late 2019 after trading oil for Petrolama Energy Canada and Spain’s Repsol SA. He earlier was director of international oil trading at BG Group.

Exxon recruited a cadre of experienced traders hoping to replicate rivals BP and Royal Dutch Shell in trading. Both generated enormous trading profits last year by buying oil during the downturn. They sold it at higher prices for future delivery, posting multibillion-dollar profits for the year.

In contrast, Exxon began restricting the group’s access to capital as the pandemic accelerated, laid off some staff and offered early retirement packages to others, Reuters reported. Exxon does not separately report the performance of its trading unit.

(Reporting by Gary McWilliams in Houston, Devika Krishna Kumar in New York and Julia Payne in LondonEditing by David Evans and Matthew Lewis)

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G7 global tax plan may hit corporate titans unevenly

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An agreement by wealthy nations aimed at squeezing more tax out of large multinational companies could hit some firms hard while leaving others – including some of the most frequent targets of lawmakers’ ire – relatively unscathed, according to a Reuters analysis.

Finance ministers from the Group of Seven leading nations on Saturday agreed on proposals aimed at ensuring that companies pay tax in each country in which they operate rather than shifting profits to low-tax havens elsewhere.

One proposed measure would allow countries where customers are based to tax a greater share of a multinational company’s profits above a certain threshold. The ministers also agreed to a second proposal, which would levy a minimum tax rate of 15% of profits in each overseas country where companies operate, regardless of profit margin.

The Reuters review of corporate filings by Google-owner Alphabet Inc suggests the company could see its taxes increase by less than $600 million, or about 7% more than its $7.8 billion global tax bill in 2020, if both proposed measures were applied. Google is among the companies that some lawmakers have criticized as paying too little tax.

Meanwhile, medical group Johnson & Johnson, which is also U.S.-based, could see its tax bill jump by $1 billion, a more than 50% rise over its $1.78 billion global tax expense last year, according to Reuters’ calculations.

Both Google and J&J declined to comment on the calculations.

In a statement Saturday following the G7’s agreement, Google spokesman José Castañeda said: “We strongly support the work being done to update international tax rules. We hope countries continue to work together to ensure a balanced and durable agreement will be finalized soon.”

Determining the exact impact the new rules will have on companies is difficult, in part because companies don’t typically disclose their revenues and tax payments by country. And key details about how the rules would be implemented are still pending, tax specialists say, including to which countries profits would be reallocated and to what degree taxes generated by the new measures would offset taxes owed under the current system.

The proposed rules themselves also face hurdles. In the United States, several top Republican politicians have voiced opposition to the deal. Details of the agreement are also due to be discussed by the wider Group of 20 countries next month.

Four tax specialists concurred with Reuters’ methodology but noted that there is still uncertainty about how the measures would be applied, including which tax breaks are included in the 15% minimum overseas tax.

The G7 comprises Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.

“The deal makes sure that the system is fair, so that the right companies pay the right tax in the right places,” said a spokesperson for the UK Treasury, which hosted the G7 meeting. “The final design details and parameters of the rules still need to be worked through.”

SHARING PROFITS

The first proposed measure focuses on large global firms that report at least a 10% profit margin globally. Countries in which the companies operate would have the right to tax 20% of global profits above that threshold in an effort to stop companies reporting profits in tax havens where they do little business.

Applying that formula to Google could result in as much as $540 million in additional taxes, according to the Reuters analysis.

Based on Google’s 2020 global profits of $48 billion, Reuters calculated what portion of that income could be reallocated based on the G7’s proposed formula. Reuters then calculated how much more the company would pay if tax was levied on that portion of income at the rate of 23% – which is the average tax rate for developed nations as identified by Paris-based research body the Organization for Economic Cooperation and Development – rather than the average overseas tax rate of 14% that Google said it paid last year.

Applying the same methodology to J&J, and its 2020 global profits of $16.5 billion, the healthcare company would see its global tax bill rise by about $270 million as a result of the first measure.

The exact impact on each company’s tax bill would depend on how much income is actually reallocated. Also at issue is which country the profit is moved from and to – and therefore what the increase in tax rate is. If all the reallocated profit comes out of zero-tax jurisdictions, the impact could be greater.

MINIMUM TAX OVERSEAS

U.S. and UK officials say the other measure, involving a 15% global minimum tax, will have a bigger total impact on how much in taxes governments collect. But its effect on companies will vary widely. In recent years, Google-parent Alphabet, like some other targets of tax campaigners, has reorganized its international tax structures and last year reported over three-quarters of its global income in the United States compared to less than half in each of the previous three years, according to its corporate filings.

Google reported $10.5 billion of dollars of earnings from outside the United States last year and an average overseas tax rate of 14%, which is one percentage point below the G7’s proposed minimum tax.

If Google’s overseas earnings were all taxed at 15%, the additional tax due would be $100 million. The impact could be higher if a large proportion of the money is earned in zero-tax jurisdictions like Bermuda, where Google used to report over $10 billion a year in income. Conversely, the impact of the minimum tax would be reduced if the first measure prompted Google to reallocate some of its non-U.S. earnings out of tax havens.

Excluding the impact of the first proposed measure, increasing the tax rate on overseas income to 15% would mean $45 million of additional tax.

The situation for J&J would be very different. It earned 76% of its 2020 income outside of the United States and paid 7% tax on average on that overseas profit. Applying a 15% tax rate to that overseas income figure would result in $990 million in additional taxes, according to Reuters’ calculations.

While the reallocation of profit under the first measure would reduce this impact, the combined result of the two measures would be more than $1 billion.

Academics say businesses are adept at mitigating the impact of measures that are designed to reduce tax avoidance and therefore could re-organize in order to limit the impact of the proposed measures. And, in reality, tax incentives offered by governments mean companies may end up paying less in practice.

 

(Reporting by Tom Bergin; Editing by Cassell Bryan-Low)

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