(Bloomberg Opinion) -- The blame game over the breakdown of Fiat Chrysler Automobiles NV and Renault SA’s 35 billion-euro ($39 billion) merger will soon pass. The enduring question is whether the two carmakers have better options than combining with each other. Returning to the table still looks like the least painful way forward.
Fiat walked, citing French politics. Its 50:50 merger proposal was clearly not far from being an acceptable deal. The terms offered a financial premium and pledges to safeguard jobs, while identifying savings for Nissan Motor Co., Renault’s existing partner. Fiat has to protect its own shareholders – its withdrawal reminds the world they matter, too – but the Italian carmaker was wise to leave the door slightly ajar.
Neither Fiat nor Renault have a plan B that looks quite as attractive industrially. For the former, the alternative European move looks to be a merger with Peugeot SA. Crunch the two together at today’s market values and Peugeot’s shareholders would own 51% of the combination, giving them a smidgen more of the value creation and the impression of getting the better side of the deal. Paris might feel that is an easier transaction to sell to the French public – especially as Fiat’s average market value over the last six months has been slightly higher than Peugeot’s.
Yet it’s hard to believe that Peugeot would be a better cultural fit than Renault. That is a paramount consideration for a complex merger integration. Fiat’s talks with Renault evolved speedily from an initial discussion about an industrial partnership. Even if you didn’t believe the companies would ever fully achieve the 5 billion euros of annual synergies Fiat identified, the benefits would be still be considerable. What’s more, Renault’s alliance with Nissan means the scope for savings could be well beyond what might be possible with Peugeot.
For Renault, a transaction with Fiat remains the most credible near-term way of narrowing the discount to its theoretical value. If you subtract the value of the French carmaker’s stake in Nissan, its cash and other investments, shareholders put no value whatsoever on its actual business of making vehicles.
True, the carmaker has the possibility of expanding industrial ties, and possibly merging, with Nissan. But it cannot ignore the market reaction to the Fiat proposal. Shares of Renault, Fiat and Peugeot are all up slightly from where they were before talks leaked 12 days ago, baking in some lingering hope of consolidation. Renault stock, however, is up the most. That might be the market waking up to its undervaluation. More likely, it’s a recognition of what the company stands to gain if consolidation remains possible.
Choreographing a comeback won’t be easy. This is a battle to be the master of Renault while making a transaction look like a merger of equals. Any final agreement would probably have to look like it was brokered by Paris. What will matter for investors is whether continued government interference prevents decisions from being made on a commercial basis.
Under Fiat’s first proposal, the two companies would nominate four directors each. The French state would be excluded from the boardroom and see its voting rights fall from just under 30% to 7.5%, in line with its economic stake in the combined company. Giving it one of the four board seats, while still diluting its voting power, could be a tolerable a compromise to get a deal done. France's influence would still be reduced relative to today, which might just persuade Italy against trying to acquire a stake and a matching seat.
After all, France and Italy are going to make life difficult for these companies either way – whether they are in the board room or not. Leave it to the market to punish the stock accordingly.
To contact the editor responsible for this story: Edward Evans at eevans3@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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