Fiat Chrysler in talks with Peugeot over potential tie-up

Talks between Italian-American automaker Fiat Chrysler (FCA) and France's PSA, which owns Peugeot and Citroën, over a potential tie-up that could create a $50bn car giant, gathered pace on Wednesday.

One source said a deal could be announced as early as Thursday.

The two groups said in separate statements they were holding discussions aimed at creating one of the world's leading car makers, better placed to tackle a host of costly technological and regulatory challenges facing the global auto industry.

A deal could be announced as early as Thursday, a source familiar with the discussions said. A Fiat Chrysler Automobiles (FCA) spokesperson declined to comment on a timeline.

After ditching a proposed merger with Renault in June, FCA chair John Elkann confirmed the group's bid to pursue an alternative alliance as carmakers face huge investments in electrification, emission reduction and autonomous driving technologies.

Even if a combination of PSA and FCA succeeds in overcoming political, financial and governance hurdles, the new enterprise would still face substantial challenges.

The deal is being put together as carmakers face a global downturn in demand at a time when the cost of investments into low-emission technologies are rising as deadlines to meet ever more stringent anti-pollution rules loom.

Morningstar senior equity analyst Richard Hilgert said in a note that total volumes of FCA and PSA, including China joint venture partners, amounted to 8.7 million vehicles last year, ranking the eventual combined group fourth behind Volkswagen, Toyota and the Renault/Nissan alliance, each at more than 10 million vehicles.

"We view the combination of these two companies as reasonable given global competition, high capital intensity, and industry disruption from electrified powertrain as well as autonomous technologies," Hilgert said.

France is closely monitoring the merger discussions, with special attention given to governance matters, a French finance ministry source told Reuters on Wednesday. Paris has a 12% stake in PSA through state bank BPI.

Investors have speculated for years that FCA - itself the product of an Italian-U.S. merger - was hunting for a further partner, encouraged by the rhetoric of the company's late chief executive Sergio Marchionne.

FCA, controlled by Exor, the holding company of Italy's Agnelli family, had discussed a combination with PSA earlier this year, before it proposed a $35bn merger with Renault.

At that time, FCA said a deal with Renault offered more advantages than a combination with PSA, but Elkann, a scion of the Agnelli family, broke off talks after French government officials intervened and pushed for Renault first to resolve tensions with its Japanese partner Nissan.

In addition to the French government's 12% shareholding in PSA, the Peugeot family and the Chinese government each have a similar holding.

The Chinese presence might trigger doubts in the US over a potential merger, as trade tensions between Washington and Beijing remain high.

Max Warburton, an analyst at Bernstein, said the combination of FCA and PSA had more logic and greater chance of success than the previously attempted FCA-Renault deal, but said PSA offered few synergies in the US, Latin America and China. "The focus will be Europe," he said.

PSA's supervisory board is due to meet on Wednesday to discuss the potential deal, two sources close to the matter said. FCA said in its statement it had nothing more to add for the time being.