* Exor open to diluting FCA stake in case of good deal

* FCA approached more than one car company to seek deal

* FCA has "good prospects" says chairman Elkann (Adds detail and background)

By Agnieszka Flak and Gianni Montani

TURIN, May 29 (Reuters) - An email sent by Fiat Chrysler Automobiles chief Sergio Marchionne to General Motors (GM) about a possible merger was not the only such conversation FCA has had with other industry players, the Italian-American carmaker's chairman said on Friday.

The New York Times reported on Saturday that Marchionne had emailed GM Chief Executive Mary Barra in March suggesting the two companies combine, but was rebuffed.

Marchionne said on Thursday only that he writes "lots of emails", but Fiat Chrysler Chairman John Elkann confirmed the email had been sent.

"It was not the only email, it was not the only conversation," Elkann told reporters, referring to discussions about possible tie-ups.

Reuters reported in April, citing sources familiar with the situation, that Marchionne was hoping for a big deal, possibly in the United States, to plug the carmaker's weaknesses and cement his legacy before stepping down in early 2019.

Marchionne and Fiat's founding Agnelli family are showing particular interest in GM, sources told Reuters at the time, after the U.S. carmaker's move to tie up with France's Peugeot failed.

Asked if FCA would consider a hostile bid for GM or other players in the sector, Elkann said the company would "act with determination if there are the prerequisites to do something that makes sense", without giving any details.

However, the world's seventh-largest carmaker may have trouble finding a partner. Its debts rank among the highest in the industry, it barely breaks even in Europe and it is expected to burn cash for years. It is also smaller than most rivals.

KEY OBSTACLE

FCA's stock market value of $20.69 billion is far below GM's $58.48 billion and Volkswagen's 106.6 billion euros ($117 billion), ThomsonReuters data shows.

It may be able to persuade smaller companies like Peugeot , whose market value is 15.08 billion euros, to talk, though a key obstacle to any combination would be the issue of closing factories in Europe to achieve cost savings.

Peugeot chief Carlos Tavares was quoted saying earlier this year it was too early to talk about a merger, wanting to focus on his own recovery first.

Nonethless, Marchionne has repeated calls for shrinking the number of players in the global auto industry to help sustain the heavy investments needed to meet demands for cleaner, safer vehicles.

Elkann, a scion of the Agnelli family that controls Fiat Chrysler via its Exor holding company, said he supported Marchionne's call for consolidation, which he hoped would spark a debate in the industry.

He said he had no doubt consolidation would happen, but declined to comment on an ideal partner for Fiat Chrysler or other possible combinations in the sector.

Elkann reiterated Exor would be open to diluting its stake if it meant boosting the carmaker's fortunes. "Exor and my family ... will not be an impediment to a good transaction for FCA," he said.

Elkann said the carmaker had "very good prospects" given Fiat's merger with Chrysler and the new models it has been bringing out as part of a five-year investment plan that aims to increase annual sales to 7 million vehicles by 2018.

Sergio Marchionne’s hunt for a partner is far from over.

Directors of Fiat Chrysler Automobiles NV, set to meet in London on Thursday, are expected to review a more detailed analysis of potential tie-ups with several automakers, according to two sources close to the situation. The companies include General Motors Co., Volkswagen AG and Renault-Nissan.

Marchionne, the FCA CEO, makes no secret that he covets GM most. Still, CEO Mary Barra and GM’s directors, in a March 12 letter, rejected a proposed merger that envisioned absorbing FCA into GM, calling the new entity General Motors and headquartering it in Detroit.

No deal. But the global auto industry’s shrewdest dealmaker isn’t quitting — even if it means trying to mount a hostile takeover of the nation’s No. 1 automaker to realize his vision for driving consolidation to achieve greater economies of scale and fatter shareholder returns.

He’s retained consultants to test his team’s assumptions of a tie-up with GM and others. He’s also telegraphing who he sees as a potential partner: United Auto Workers President Dennis Williams and the union’s retiree health care trust, whose 8.7-percent stake in GM makes it the company’s largest shareholder.

“Whatever happens in terms of consolidation, it would never be done without the consent and support of the UAW,” Marchionne said earlier this month at the opening of FCA-UAW national contract talks. “It’s that simple.”

Not exactly.

Should Marchionne assemble a stable of like-minded shareholders who embrace his industrial logic and move to acquire GM shares, a tie-up with GM — more than deals with VW or Renault-Nissan — likely would face resistance on multiple fronts.

An FCA-GM merger would give the new company 50 percent of the North American pickup and SUV market, according to an analysis by Sanford C. Bernstein & Co. LLC, highlighting one of many potential anti-trust problems the deal likely would encounter from regulators in the United States and overseas.

“We would assume that FCA-GM would run into all sorts of anti-trust issues,” Bernstein wrote in a report last month. “But Marchionne has already said in public (back in 2014) that he believes regulators could be persuaded to allow a deal if it permitted the industry to hit future fuel economy targets.”

The Obama administration, politicians on both sides of the aisle and some segments of the general public may disagree. Six years after American taxpayers rescued GM and Chrysler Group LLC from automotive oblivion, the prospect of an FCA-GM merger likely would raise fears of lost jobs, plant consolidation and disruptive restructuring.

In his public musings, Marchionne explicitly says he would not engineer a deal that endangers “the blue collars,” as he said two weeks ago. He’s less categorical about salaried employees, or details of how a merger would affect brands and sales networks, among other things.

Additional complications likely would come from the UAW, too. Marchionne considers union support critical to whether and how he could craft any transaction with GM or others. He and Williams have known one another for nearly a decade, when Marchionne was named chairman of Fiat SpA’s CNH agricultural equipment unit.

The relationship may prove beneficial during labor talks, but it’s less clear it would assure anything approaching UAW support for what would be an industry mega-merger. More than his predecessor, Bob King, Williams favors a business-like approach to bargaining and expresses caution about prospective deals that could affect adversely his members.

More importantly, the UAW Retiree Medical Benefits Trust’s stake in GM isn’t without significant strings. Under a 2009 agreement between post-bankruptcy GM and the U.S. Treasury Department, the union’s shares must be voted proportionately with the remaining shareholders — effectively making it difficult, if not impossible, for the union to become a party to anything like a hostile takeover.

The arrangement means the union, through the health care trust, does not wield outsized influence as a major shareholder in GM, according to several sources familiar with the details. But the union arguably does have greater sway inside GM than it did before its epic collapse into Chapter 11 bankruptcy.

The UAW also has a representative, retired UAW Vice President Joe Ashton, on GM’s board of directors. As a practical matter, that seat and the health trust’s stake gives the union access to GM’s strategic thinking, including its internal assessments of such prospective transactions as the one proposed by Marchionne.

Barra’s letter to Marchionne rejecting his proposal offered no rationale for GM’s decision. But an extensive review conducted in 2012 by then-CEO Dan Akerson, Vice Chairman Steve Girsky and GM President Dan Ammann — each veteran dealmakers — evaluated multiple combinations. They ranged from powertrain joint ventures and specific brand acquisitions to a complete merger, according to a ranking source familiar with the process.

Impediments to a potential deal included anti-trust concerns; the likelihood of political backlash; the probable need to build more corporate infrastructure; and the likelihood that it would be far easier to identify the upfront expenses associated with the transaction than the follow-on “synergies” so often touted by investment bankers but rarely realized.

Marchionne is privately dismissive of such concerns, focusing instead on the valuable amalgamation of brands, engineering know-how and global reach that could be achieved with GM. A chart he uses to bolster his point shows an FCA-GM tie-up would deliver more to markets and shareholders than mergers with either VW or Renault-Nissan.

Italian by birth but reared and educated in Canada, he believes an FCA-GM combination would build an American automotive juggernaut to rival the brand portfolio of VW and the scale of Toyota Motor Corp. The extended Agnelli family, whose holding company owns 30 percent of FCA, would diversify its extensive holdings by owning a smaller piece of a more valuable GM.

The trick is making the sale from what is perceived by analysts and rival automakers to be a position of weakness. FCA is smaller, has more debt and less cash than GM. Its leadership looks both opportunistic and a little desperate. The lack of major GM shareholders with whom to partner, for now, makes a run at GM all the more complicated.

And FCA’s deepening tangles with federal regulators arguably make it a less attractive partner — at least for the time being. Vehicle buybacks and fines are likely to cost the automaker heavily, even as they sully the brand cred of heavyweights like Jeep and Ram.

That’s not helpful, but it’s not permanent. The changing global automotive landscape is most challenging to those who lack the cash and scale to compete and profit — a fact Marchionne knows, and he’s trying to do something about it.

DETROIT -- General Motors has flatly rejected the advances of its crosstown rival, Fiat Chrysler Automobiles, but FCA CEO Sergio Marchionne is not going away -- not by a long shot.

Marchionne says he has sweated the details and done the math and discovered there's far too much upside in a merger of FCA and GM to let a deal go undone, or at least unexplored.

In a blunt, two-hour interview in his downtown Detroit office, Marchionne said the numbers come out so good that his board of directors has no choice but to put pressure on GM to begin discussions now.

"It would be unconscionable not to force a partner," he said.

That sounds like a hostile takeover bid is in the works.

"Not hostile," said the FCA chief. "There are varying degrees of hugs. I can hug you nicely, I can hug you tightly, I can hug you like a bear, I can really hug you. Everything starts with physical contact. Then it can degrade, but it starts with physical contact."
GM insiders, speaking on background, question Marchionne's assertions about synergies and suggest a merger with FCA is a bad idea all around.

"Why," asked a high-ranking GM executive, "should [GM] bail out FCA?"

But Marchionne says the logic of the deal is "irrefutable."

"We're not talking about marginal improvement in margins," he said, "we're talking about cataclysmic changes in performance, just huge."

He said: "I've gone through product by product, plant by plant, area by area, and I've analyzed them all.
"I've obviously made some arbitrary assumptions about which architectures survive, which engines survive, and the only deal that offers them the same benefits as we potentially get ... is us."

The potential profits, he says, are exponentially larger than the current combined global earnings of GM and FCA.

Marchionne says GM isn't taking his phone calls.

"I've offered to sit down with them and take them through the numbers," said the Italian-Canadian CEO as he sipped an espresso and swiped through documents on his tablet, giving his visitors a cursory look at various charts and graphs he says make his case.

"They won't listen. And that kind of abject refusal to engage ... the capital markets won't understand why you are rejecting the discussion.

"You may reject the deal but you can't reject the discussion. If you're refusing to talk to me, and you have seen nothing, you either think you're above it all, or you think the capital markets are full of schmucks that owe you something."

'A better deal'

Marchionne says he doesn't lack for potential partners and he could sell or merge FCA as it stands today.
"There have been responses of people who have shown interest in discussing," he said. "Are they the people I wanted to get the response from? The answer is probably not. There are people who are interested in doing deals. I'm not interested in doing deals with them ... because there's a better deal.

Without specifying how he arrived at the figures, Marchionne cites a staggering combined EBITDA (earnings before interest, taxes, depreciation and amortization) figure that he says would result from the merger of FCA and GM.

"Look, the combined entity can make $30 billion a year in cash. Thirty. Just think about that [expletive] number," he said. "In steady-state environments, it'll make me $28 to $30 billion," at a seasonally adjusted annual selling rate of 17 million.
Arndt Ellinghorst, head of global automotive research at Evercore ISI, says the target is realistic.

"A combined GM-FCA will generate almost $25 billion in EBITDA this year," Ellinghorst wrote in an email. "If you assume some synergies and peak U.S. cycle market conditions then, yes, they could get to 30 billion in EBITDA."

On background, a GM official said company executives have not seen Marchionne's analysis of what a combined company would look like. But he expressed doubts about how Marchionne could hit his profit projection while keeping a promise made to dealers last week in Las Vegas not to impact retailers or cut manufacturing jobs.

Asked directly, a GM spokesman wouldn't call Marchionne's analysis wrong but said GM officials believe the company and its shareholders are better off on their own.

Marchionne said he has never met GM CEO Mary Barra.

"I'm not trying to date Mary, for the record, but I tried to get to see her."

A GM spokesman said: "We've responded appropriately to any outreaches that he's had."

And if there is resistance to sitting down with FCA because of Marchionne's reputation as a crafty and cagey deal-maker, Marchionne has an answer for that, too.

"Look, I'm a tough negotiator and people know it, right? I am who I am, but so what?" he said. "Send somebody else in. Send the shark. I'd come off the table."

Marchionne insists there is too much to be gained. He said he is "not the guy at the corner who's selling pencils. I tell you that you can make X billion more by being together, I guarantee you that I can carry half the market."

A hard slog

In a note to investors in June, Max Warburton, an analyst at Sanford C. Bernstein, wrote: "Putting together FCA and GM looks like an operational and management nightmare -- but frankly if anyone can smash through the issues and make it function, it would be Marchionne."
The FCA chief himself said: "An attack on GM, properly structured, properly financed, it cannot be refused. You can play hardball to a point. ... It's too big to ignore, which is the issue that our board is facing."

Barra, who publicly swept aside Marchionne's advance, said in June, "We have scale," and she said GM is busy "merging with ourselves."

Marchionne admits joining with GM would be a hard slog, but he stands by his claims.

"When you get to these type of analyses and this type of very thorough introspection about your business and the other guys' ... you walk away with a conviction that barring implosions ... driven by cultural differences that it's worth taking the risk. The benefits are so high that I don't think you can stop the machine.

"This is not a question of telling me to screw off. I understand [GM's] desire to be alone and execute [its] plan. I've listened to the comments ... 'we're still merging with ourselves,' which I do not buy for a company that is 107 years old. You can't merge with yourself."