Fiat-Renault's Giant Merger Doesn't Look So Simple Now
(Bloomberg Opinion) -- Renault SA’s imminent board meeting to assess Fiat Chrysler Automobiles NV’s merger proposal had appeared purely theatrical. The automotive rivals’ union was seemingly endorsed by the French government from the get-go. Renault chairman Jean-Dominique Senard has been openly selling the tie-up to his company’s strategic partner Nissan Motor Co Ltd. Deferring the Renault board gathering until this week to allow for discussion of the deal looked like diplomacy.
But the meeting suddenly has real significance: A sweetener may now be needed to get this merger over the line. Minority investors can’t be sure this is a good thing.
The precise terms of a Fiat-Renault deal matter. Fiat proposes splitting ownership of the combination 50:50, meaning both companies would surrender half the upside from any improvement in the businesses they contribute. That’s pertinent for Renault, which doubtless feels undervalued. Analysts value the sum of Renault’s parts significantly higher than its market capitalization. Moreover, the French group’s share price was knocked by the arrest of former CEO Carlos Ghosn in November.
In isolation, these considerations don’t generate enough leverage to extract better terms from Fiat. There is no credible method of realizing Renault’s break-up value by way of asset sales. Its profitability without a partner is questionable given the investment burden of electric vehicles. Its 43% stake in Nissan could not be sold at market price.
As for the Ghosn impact, Renault constituted a slightly higher portion of the two groups’ combined market value in the six months before his arrest than it did in the six months before Fiat’s merger plan surfaced. A 10% premium in Fiat’s offer already recognizes this.
The Italian company’s terms are basically fair as they are. Renault has looked undervalued for years. The Fiat deal would be a catalyst for getting investors to think differently, as JPMorgan notes.
But making a merely fair offer isn’t always enough to succeed. A sudden change of heart by the Paris government could yet give Renault cover to start testing whether Fiat's proposal was just an opening gambit.
Berenberg analysts have identified potential sweeteners. Fiat could inject more equity value into the tie-up by cutting its debt instead of paying a planned special dividend to its shareholders. Or Renault could pay its own special dividend, hence giving more to the French side – an idea now being pushed by Paris, Bloomberg News reports.
More likely, non-financial gestures may be needed to secure definitive government support. The French government wish-list includes letting the state retain its board seat, which was due to be scrapped, and giving more concrete assurances on jobs.
Ironically, that would sour the deal for minority shareholders. They were looking forward to a merged Fiat-Renault having reduced state influence. Paris’s involvement in the company is probably one reason why Renault’s stock price ascribes so little value to its core business. Fiat’s proposal offered a remedy. The more France meddles, the more it reinforces the discount this deal was meant to fix.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
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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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