FCA Calls Off Renault Merger; Investors Doubt PSA Will Step In.
“Renault needs to let the Japanese go, sell Nissan stake to the Japanese. With billions in the bank and a higher share price, call again”
The planned merger between Renault and Fiat Chrysler Automobiles (FCA) crashed and burned and investors fear that if the French government derailed it, that probably rules out a counter merger offer from PSA Group for FCA.
The French government has a 15% stake in Renault and owns 13% of PSA Group.
If the talks failed because of complications generated by Renault’s alliance partner Nissan Motor of Japan, then perhaps a merger deal could be hammered out with PSA Group, which has been tipped as a logical partner.
One analyst said the deal could be revived if Renault sold its Nissan stake.
Negotiations broke down late Wednesday, with FCA saying political conditions in France don’t currently exist for the merger to proceed. Renault said it was unable to take the deal further because the French government had postponed a decision to progress it.
FCA proposed a merger with Renault which would be 50% owned by it and 50% by Renault. Combining Renault and FCA would produce a company with annual output of about 9 million vehicles, and rank third behind Volkswagen and Toyota. Including Renault alliance partners Nissan and Mitsubishi, the combined output would reach close to 15 million and into number one spot.
The Renault alliance with Nissan is a potential complicating factor because it has been under pressure recently, not least because Japanese authorities arrested former CEO Carlos Ghosn on corruption charges, which he denies. The alliance was already creaking because the Japanese felt they had less influence than their contribution demanded.
Vulnerable to failure
Investment researcher Jefferies said Renault was more vulnerable than FCA from the failure of the $37 billion merger.
Jefferies analyst Philippe Houchois wondered if Nissan was influencing the French government’s outlook indirectly.
Houchois said the conciliatory tone of FCA’s statement made him think there might still be some life in the deal if it made some concessions to the French government. If Nissan was the problem, this might revive PSA Group’s interest.
“If Nissan was an obstacle PSA-FCA discussions could resume. There is still a solid fit with PSA although probability looks low,” Houchois said.
PSA Group was said to be attracted to FCA because the French company coveted a U.S. presence so it could advance its global ambitions. This was less crucial to Renault because its alliance with Nissan served up big U.S. sales.
Bernstein Research analyst Max Warburton said the deal seems dead, and didn’t see much possibility of a renewed one with PSA.
“This was supposed to be a deal that would sort FCA’s problems in Europe and give Renault new options. But something has gone very wrong – and whether it’s a change of view on the part of the French government or militancy on the part of Nissan, or both – they are probably linked, the deal seems dead. Not because Renault has said no, but because FCA has pulled out,” Warburton said.
“Expect PSA (share price) to rise on unrealistic hopes it may be FCA’s next date,” Warburton said.
Warburton said FCA risks looking desperate after seeking a deal with General Motors in 2015, and doubted a PSA Group deal could be revived. The Renault deal with FCA was retrievable if it sold Nissan.
“Renault needs to let the Japanese go. It should sell its Nissan stake to the Japanese government or Japanese banks. Then, with billions in the bank and a higher share price, call (FCA) again,” Warburton said.
Investment researcher Evercore ISI also saw a limited chance the talks might be revived.
Is it dead?
“FCA’s retreat doesn’t necessarily mean that a merger is completely off the table, the likelihood of it happening has materially fallen,” Evercore ISI analyst Arendt Ellinghorst said.
Reuters’ Breaking Views column pointed out that FCA and Renault now risked losing out on synergies worth $5.6 billion a year, while the French state had sabotaged its pro-business credibility. Breaking Views also thought there was a slim chance of reviving the deal.
“The biggest loser of all is the French state. President Emmanuel Macron came to power on a broadly market-friendly agenda, and promised privatizations. And yet his government has retained its outsize influence at Renault, a major grievance for Nissan and now Fiat. Macron may have now consigned a national flagship carmaker to M&A limbo. That’s an embarrassing, and potentially very expensive, mistake,” Breaking Views columnist Liam Proud said.
When the merger between Renault and FCA was announced the talk was of promised massive benefits with happy investors talking about huge cost savings and synergies.
But later some questions were asked about just how to achieve the cost savings. Could this really be achieved without closing plants? How could a merged French, Italian, American, Japanese company exist with a French government stake, albeit diluted down to 7.5%. Could the Nissan part of the alliance be happy to come on board with its stake reduced to 7.5% but with voting power, from the previous non-voting 15% in Renault?