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WATCH: Fiat Chrysler and Peugeot reach 'binding' merger agreement

WATCH: Fiat Chrysler and Peugeot reach 'binding' merger agreement

PARIS/MILAN - Fiat Chrysler and Peugeot owner PSA have reached a binding agreement over their roughly $50 billion (R718bn) merger that will reshape the global car industry.

France's PSA and Italian-American Fiat Chrysler (FCA), which are yet to decide on a name for their new company, will now start work on delivering their pledge to cut costs by 3.7 billion euros (R58.8bn) a year without closing factories.

That will be all the harder with politicians and strong labour unions in both France and Italy worried about job losses at a combined business that will employ around 400 000 people.

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"The merged group will have to make massive savings and probably also close plants, even if the CEOs' choice of words is different," said NordLB autos analyst Frank Schwope after the binding agreement was announced on Wednesday.

French finance minister Bruno Le Maire, meanwhile, welcomed the move to bring together Europe's second and third biggest carmakers, while adding the French government - a key shareholder in PSA - would remain vigilant on matters including where "decision centres" are located within the new group.

PSA and FCA announced preliminary plans six weeks ago for a 50-50 all-share tie-up that will rank as the world's fourth-largest carmaker behind Volkswagen, Toyota and the Renault-Nissan alliance.

The deal is aimed at helping both companies cope with slowing demand for vehicles and the cost of building cleaner cars to meeting tougher emissions regulations.

With brands including Jeep, Dodge, Ram, Chrysler, Alfa Romeo, Maserati and Opel, the companies sold a combined 8.7 million vehicles last year, but have potential manufacturing capacity of 14 million, according to forecasters LMC Automotive.

Most products concentrated on two platforms

They have yet to say precisely how they plan to tackle that potential excess, and which car platforms - or underlying vehicle structures - they will focus on, only detailing that most production would be concentrated on two platforms.

"At this stage nothing is decided. We have been evaluating what the opportunities are," PSA Chief Executive Carlos Tavares, who will head up the merged entity as CEO, told reporters.

There is no time to lose as both PSA and FCA are "currently lagging far behind the competition in terms of technology and product range," NordLB's Schwope said.

PSA and FCA said in a statement they expected the deal to close in the next 12 to 15 months, and they would come up with a name over the coming months.

FCA said it would meet unions on Friday to discuss the merger.

PSA and FCA confirmed the new group would have an 11-strong board, with five members nominated by PSA and another five by FCA. These will include labour representatives from both.

Tavares, whose initial five-year term as CEO will begin once the deal has closed and gained all approvals, will have the additional seat on the board.

The companies did not clarify what would happen when Tavares leaves. Two sources close to PSA told Reuters last week that French stakeholders were seeking reassurances they would retain a numerical advantage on the board.

A shock lawsuit by General Motors filed last month against FCA in the United State over alleged union bribing did not affect the merger terms, FCA CEO Mike Manley told reporters, reiterating the claim was "meritless".

Manley said he hoped FCA would "now dispose of that quickly" and if not, the company would defend itself vigorously. 

Reuters