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The proposed merger between Fiat Chrysler Automobiles and France’s Renault, a deal that would have created the third-largest car maker, has collapsed. But FCA appeared to keep the door open by touting the merits of the deal.

The merger, worth about €33-billion, was thought to have been on the verge of success. But to the surprise of Renault and the French government, which owns 15 per cent of the car maker, FCA walked away from the deal early on Thursday and placed the blame firmly on the French state.

In a press release, FCA said “it has become clear that the political conditions in France do not currently exist for such a combination to proceed successfully.”

Shares of both companies tumbled but recovered somewhat later in the day. In Milan trading, FCA shares ended flat. Renault lost 7.5 per cent, taking its market value to almost €2-billion less than FCA’s.

FCA’s decision to withdraw came immediately after the Renault board pushed back a decision to endorse the deal for the second time this week. After six hours of talks between the two companies at Renault’s headquarters in Paris, Renault said it “was unable to take a decision due to the request expressed by the representatives of the French state to postpone the vote to a later council.”

In a statement, French Finance Minister Bruno Le Maire said the government wanted more time to reach an agreement with Japan’s Nissan, which is 43 per cent owned by Renault. While Nissan was not specifically part of the merger proposal between FCA and Renault, the French company apparently thought Nissan’s support was crucial to the success of the overall deal.

Mr. Le Maire said, “An agreement had been reached on three of the four conditions. What remained to be obtained was the explicit support of Nissan.” He gave no other details.

FCA, whose brands include Jeep, Ram, Chrysler, Fiat, Alfa Romeo and Maserati, had been circling Renault for some time. John Elkann, Fiat chairman and heir to the Agnelli dynasty, the Italian family that created Fiat and owns 29 per cent of FCA, was convinced that neither FCA nor Renault had the global presence or financial clout to thrive in an industry facing upheaval. The move to zero-emission and self-driving cars will require enormous investments.

The initial response from Renault chairman Jean-Dominique Senard was positive. Renault has no presence in North America, a hole that could be filled by FCA. At the same time, Renault was far stronger than FCA in electric cars. FCA and Renault together would make 8.7 million vehicles a year, putting it third behind Volkswagen and Toyota and ahead of General Motors. If Renault’s alliance with Nissan and Mitsubishi were added to the mix, FCA-Renault would be the world’s top automaker.

The proposed merger was always bound to be politically difficult, given the French government’s stake in Renault, the complicated cross-ownership between Renault and Nissan, and the French and Italian governments’ fears about job losses. But in proposing their 50-50 merger, both sides had promised that no factories would be closed, making some analysts wonder how putting the two companies together would generate annual synergies – cost savings – of about €5-billion, as FCA and Renault claimed it would.

Nissan’s role in the merger would prove problematic. Representatives of Nissan, which has been part of the Renault alliance for 19 years, abstained from endorsing the deal on Wednesday night, according to several reports. Nissan’s future has been uncertain since late last year, when Carlos Ghosn, who had been CEO of both Renault and Nissan, was arrested in Japan and imprisoned on charges of misappropriating Nissan funds. He has denied the allegations.

FCA said it “remains firmly convinced of the compelling, transformational rationale of a proposal that has been widely appreciated since it was submitted, the structure and terms of which were carefully balanced to deliver substantial benefits to all parties.”

The statement makes it seem that FCA is willing to resume talks if Renault and the French state show more flexibility on issues such as jobs, management control and voting power.

FCA’s strong support for a merger with Renault suggests that the talks may not be entirely dead. Options for FCA would include negotiating a technology- and production-sharing deal with Renault that falls short of a merger or pursuing a merger with, or investment from, another big car maker, perhaps a Chinese one. When FCA was run by Sergio Marchionne, who died last year, the company made several attempts to buy or merge with rivals.

Renault, however, said it would keep reviewing the proposed merger “with interest.” Analysts have calculated that Renault’s core auto-making business is essentially worthless and that most of the company’s value comes from its equity interest in Nissan.

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