Morgan Stanley: Fiat Chrysler's Proposed Tie-Up With Renault A 'Good Strategic Fit'

A potential tie-up between global automakers Fiat Chrysler Automobiles NV FCAU and Renault represents a "good strategic fit" with upside potential over and above the initial savings targets, according to Morgan Stanley.

The Analyst

Adam Jonas maintained an Overweight rating on Fiat Chrysler's Europe-listed stock with an unchanged 21-euro ($23.38) price target.

The Thesis

Morgan Stanley has nine takeaways from a conversation with Fiat Chrysler CFO Richard Palmer, Jonas said in a Tuesday note. (See his track record here.)

◘ Fiat Chrysler's initial 5-billion-euro annual run-rate savings target looks conservative, as it implies 300 basis points of combined revenue.

The benefits from shared development on autonomous vehicle and electric vehicle investments and reduction of compliance payments in Europe alone account for almost half of the share of savings.

◘ Nissan's potential participation in the merger would create the largest automaker "by far," and this adds a potential layer of additional upside.

◘ A regulatory review of the merger could take at least one year and could face notable political and regulatory scrutiny.

◘ Palmer said there would be one CEO and one headquarters, and both companies boast experience in overseeing global mergers and alliances.

◘ Fiat Chrysler could pursue alternative strategic alternatives if the "Plan A" merger with Fiat is rejected.

◘ It's possible investors would use the proposed merger as an opportunity to lower their position — especially those who were hoping for an eventual full sale of the company, Jonas said.

◘ Earnings forecasts for auto suppliers could be at risk as automakers look to lower the complexity of their vehicles.

◘ Rival automaker Ford Motor Company F would be "by far the smallest" of the mass market volume companies in Europe and may need to consider new strategic options.

◘ A bull case scenario with 8 billion euros in combined synergies would be worth 6.4 euros per Fiat Chrysler share, in Morgan Stanley's view. The bear case scenario assumes the merger is not completed.