PARIS—Fiat Chrysler Automobiles NV’s proposal to merge with Renault SA is under scrutiny in France, where the government, unions and some executives at the French auto maker are questioning whether the plan undervalues Renault and puts jobs at risk.
Fiat Chrysler wants to merge with Renault and create the world’s third-largest auto maker by production, with a market value of about $40 billion. To complete the deal, both companies would need to convince the French state and other key stakeholders in Renault that a merger doesn’t threaten its status as a symbol of national industry.
Those concerns loom large as Renault’s board prepares to vote early next week on whether to enter exclusive talks with Fiat Chrysler. The French state, which is Renault’s largest shareholder, and labor unions command six out of the 19 votes on the auto maker’s board.
French Finance Minister Bruno Le Maire, while viewing the talks as worth pursuing, has reeled off a list of demands, including French representation on the merged company’s board and heavy investment in the development of electric batteries in Europe. The government also wants the combined company to fit within the framework of Renault’s alliance with Nissan Motor Co. and Mitsubishi Motors Corp.
On Wednesday, Renault Chairman Jean-Dominique Senard and its chief executive, Thierry Bolloré, discussed Fiat Chrysler’s proposal with the CEOs of Nissan and Mitsubishi at a previously scheduled meeting in Yokohama, Japan.
Nissan’s Hiroto Saikawa said he listened to Mr. Senard’s explanation of the proposal, but he didn’t state whether or not he favors it.
“That will come later,” Mr. Saikawa said. “Of course we have to look closely at what specific advantages there would be for Nissan’s business and what problems would have to be overcome."
In any combination that involves Fiat Chrysler and Nissan, the Italian-American auto maker is expected to pitch capital savings in the U.S. market to its Japanese counterpart, a person close to the deal said.
Executives at Renault and Fiat Chrysler had been secretly exploring ways to share costs for several months, according to people familiar with the matter. But with the merger proposal made public Monday, the clock is ticking. People involved in the negotiations said both sides aim to reach an agreement before Renault’s annual general meeting on June 12.
“Right now we have momentum,” one French official said. “The more you take your time, the more you find difficulties or reasons not to do a deal in negotiations like these.”
Mr. Le Maire on Tuesday described Fiat Chrysler’s overture as “a good opportunity for Renault and a good opportunity for the European automobile industry,” given the heavy investment required to navigate the auto market’s shift toward electric vehicles and autonomous driving.
Early critics of the proposal are digging in. A key point of contention is how Fiat Chrysler envisions wringing €5 billion, or nearly $5.6 billion, in annual cost savings from the merger without shutting down factories. Plant closures are highly charged politically in Europe, which is the only region where the companies’ operations overlap significantly. Fiat Chrysler makes most of its profit and sales in the U.S., where Renault doesn’t sell cars.
Fiat Chrysler’s pledge to keep plants open doesn’t necessarily safeguard jobs because many factories could be run at a reduced capacity, said Bruno Aziere, a representative of a moderate labor union that wields a vote on Renault’s board.
The leftist CGT union, which holds one seat on Renault’s board, says the only way the French state can guarantee jobs at the merged company is to maintain a “blocking minority” by not allowing its 15% stake in Renault to be diluted in any deal. Fiat Chrysler’s proposal calls for the French government’s stake in the combined group to fall to about 7.5%, with Paris losing its special voting powers.
A person close to the negotiations said labor savings aren’t a motivating factor because synergies are expected from the pooling of purchasing across the brands and the standardization of windshields, wheels and other car parts. Fiat Chrysler is not proposing a merger of “two troubled companies that need to restructure,” the person said.
“There’s stuff they can do, but if they can get half of the €5 billion they’ll be heroes for me,” Max Warburton, an analyst at Bernstein Research, said.
Current and former Renault executives question how Fiat Chrysler’s proposal values Renault. It calls for ownership of the combined business to be evenly split between the two auto makers’ shareholders. The Italian-American car maker said its shareholders would also receive a dividend of €2.5 billion to offset the disparity between the market value of the two companies.
Patrick Pélata, a former Renault chief operating officer, criticized the proposal for valuing Renault shares as of May 24, a day after they closed at a six-year low. Fiat Chrysler had a market value of close to $20 billion, compared with roughly $17 billion for Renault. That market price gives Renault’s operations a negative value of €6 billion, excluding the market value of Renault’s 43.4% stake in Nissan, its 1.5% stake in Daimler AG and its auto-finance operations, Mr. Pélata said in an interview.
“It’s not reasonable,” he said.
One senior Renault executive said “no one will accept this price.”
A person close to Fiat Chrysler played up the company’s lucrative business of selling sport-utility vehicles and pickups in the U.S. and elsewhere. “If you’re an FCA investor, you’re contributing the jewel brands of Jeep and Ram, and in return you’re essentially getting a European business,” he said.
A memo circulated this week among top managers at French auto maker Peugeot described Fiat Chrysler’s proposal as a “virtual takeover of Renault by Fiat,” according to a person familiar with the document. Peugeot held workshops with Fiat Chrysler in recent months to discuss synergies that could flow from a tie-up, according to people familiar with the matter.
A Peugeot spokesman said the company’s strategy division regularly conducts analysis for top management using publicly available information.
The person close to Fiat Chrysler said that even with the special dividend proposed for the company’s shareholders, the deal entails a 10% premium for Renault.
Some Renault executives also warn about the cost of keeping Fiat’s fleet in line with emissions standards. The Italian-American auto maker, which relies on traditional gasoline-powered vehicles, recently struck a deal with Tesla Inc. to count the electric-car company’s vehicles as part of its own fleet in order to comply with EU rules. Analysts at Jefferies say Fiat Chrysler could have faced billions of euros in fines when new regulations become law in 2020.
“It’s a broad industry problem. FCA is in a worse position than others but it’s not totally out on a limb,” Mr. Warburton said.
The person close to the car maker said it is committed to complying with emission standards, and has pledged to invest €9 billion in electric vehicles as part of its current five-year plan.
Write to Nick Kostov at Nick.Kostov@wsj.com
Corrections & Amplifications The French state, which is Renault’s largest shareholder, and labor unions command six out of the 19 votes on the auto maker’s board. An earlier version of this article, along with a chart, incorrectly said there were a total of 17 votes on the auto maker’s board. (June 4, 2019)
