(Bloomberg Opinion) -- Fiat Chrysler Automobiles NV has a generous view of what defines a merger of equals. Its proposed combination with French rival Renault SA contains a premium. The top-up is a sign that any aspiring partner for Renault needs to show that it disagrees with the market’s dim view of the company’s worth.
The Italian suitor was capitalized at 17.8 billion euros ($19.9 billion) on Friday before its ambitions emerged, while its putative partner was worth 14.8 billion euros. Crunch the pair together at no premium and Renault shareholders would own less than half of the group, and of the value created from a merger. That wouldn’t fly in Paris. Any deal between these national icons must be seen to divide the spoils equally. What’s more, a transaction can’t look like an Italian takeover. The politics are too sensitive.
Hence Fiat has found a way to give Renault shareholders a 50% stake in the enlarged company despite the pair’s different starting points. It proposes paying a jumbo dividend to its own shareholders so that it shrinks. The implication is that both sides would then be the same size when they merge.
But the terms don’t quite deliver this egalitarian outcome: Fiat is still contributing more of the value. The Italian company isn’t in fact planning on shrinking very much, so Renault investors’ half share would be worth slightly more than what they put in. Fiat envisages paying its owners 2.7 billion euros. Back that out of Fiat’s Friday share price, add a dividend that Renault is about to pay, and the suitor’s merger offer contains a 10% premium over where Renault closed last week.
A purist’s merger of equals would see Fiat siphon off more cash for its shareholders beforehand – about 4 billion euros would do it.
Why is Fiat being so chivalrous? The answer is not that Renault has recently traded at an abnormally cheap comparative valuation. The relative size of the two companies is roughly the same whether you use Friday’s share prices or whether you use the average over the last three and six months.
Might Fiat be wildly overvalued and therefore have to be more generous? Speculation of a pairing with France’s Peugeot SA has arguably helped its stock. Even so, both Fiat and Renault are Europe’s cheapest volume carmakers based on forward earnings.
There are more plausible explanations for compensating Renault. One is that Fiat needs to respect the idea that its desired partner could indeed be too cheap. For the Renault board to agree a deal means crystallizing its current valuation and that's a big ask when you break down the market capitalization. Renault's 43% stake in Japan’s Nissan Motor Co Ltd. was worth 11 billion euros on Friday - the majority of the French group's undisturbed value. Deduct Renault's net cash and its core carmaking business effectively comes for free. How can Renault management endorse a deal at that price?
Another is that Fiat doesn’t want to take any more cash out of the business via that jumbo payout. It is set to pay a big dividend part funded by the sale of its Magneti Marelli components business. There’s more in the tank, but it needs to be careful.
More awkwardly, might it be that Fiat would be first among equals in terms of senior management and needs to compensate for that? The board will be balanced with four nominees from each side, but Fiat’s chairman John Elkann, also head of its lead shareholder Exor NV, is likely to keep his title if a deal happens. Culture starts at the top, and that means Elkann sets the course. While Renault chairman Jean-Dominique Senard is expected to be offered the CEO position, it’s hard to imagine Fiat CEO Mike Manley not having a key role too.
Renault may well get a theoretical premium in this merger of equals. That won’t automatically guarantee the French group feels like it’s got the better side of the deal.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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