After the merger attempt between Fiat Chrysler and Renault failed, Fiat announced yesterday that it is in talks with PSA Group (PEUP.PA), manufacturer of Peugeot vehicles, regarding a possible merger between the two. Such a merger would make the unified company a leading automotive giant worth about $50 billion.

The details of the proposed merger are still unknown, so the deal cannot be analyzed in-depth, but it seems like an interesting deal for both parties: Peugeot has almost no presence in the American market and Fiat has significant control over there with Jeep and Ram vehicles. In addition, Fiat is relatively weak in the Chinese market, where Peugeot has extensive and growing activity.

From a valuation perspective, like FCAU, which trades at discount to fair value (an EV/EBITDA multiplier of 1.4), Peugeot also trades at a historically low multiplier of 1.9, so the shares of the unified company will also trade at a fairly low valuation. In addition, financially both companies look great with a lot of cash on hand and stable cash flow that will not make it difficult for them to finance growth and meet liabilities down the road.

Auto manufacturers are expected to face a lot of challenges in the next few years as a result of stricter pollution regulations and the need to develop electric vehicles. Merging these two companies can assist them to better meet these challenges and increase their market share in various countries around the world.

I will keep updating on the matter as more data becomes available.