Renault Shares Dive After Profit Warning.
Investors Worry About Nissan, FCA, CO2 Complications.
“That makes the synergies on offer via a merger with partner Nissan or rival Fiat imperative to stop the profit bleed”
Renault shares dived more than 12% after the company cut its profit forecast for 2019 by 20% and investors worried that 2020 is likely to be even more challenging as global markets sag and harsh European Union fuel efficiency rules kick in.
Renault shareholders have been looking in vain for some positive news on the possible merger with Fiat Chrysler Automobiles (FCA), which itself depends on progress on the future of the troubled alliance with Nissan of Japan. A merger attempt with FCA failed earlier this year. If no progress is made sorting out the alliance, in which Nissan seeks a bigger stake and which depends on concessions from the French government, investors worry that PSA Group might step in with the offer of a deal.
Last week Renault fired its CEO Thierry Bollore, who was replaced on an interim basis by former chief financial officer Clotilde Delbos.
Late Thursday, Renault said it cut is operating profit margin forecast for 2019 to 5% from 6%, while sales would fall between 3% and 4%, citing an economic environment less favorable than expected, and tough new EU CO2 emissions rules. Renault had previously forecast flat sales for the year.
According to investment researcher Jefferies, Renault may be forced to cut its dividend, and may need to consider selling assets including Nissan shares to prop up its balance sheet.
The French government owns 15% of Renault. Nissan owns a 15% non voting stake in Renault while the French company controls 43% of Nissan. In July, Nissan announced a radical global restructuring plan after a 99% dive in first quarter operating profit. Some analysts have said Renault needs to sell its stake in Nissan for a merger with FCA to work.
Reuters’ Breaking Views column expects Renault problems to mount.
Margin vulnerable to collapse
“Unless Delbos can successfully pass them (extra costs of EU CO2 regulation) on to belt-tightening European consumers, Renault’s already shaky operating margin is vulnerable to further collapse,” Breaking Views columnist Christopher Thompson said.
“That makes the synergies on offer via a merger with partner Nissan or rival Fiat imperative to stop the profit bleed. The estimated present value of merged savings with the latter, amount to some 33 billion euros ($37 billion) on Breaking Views calculations, handily more than both companies’ current market capitalizations. A 12% share-price decline on Friday suggests investors are sceptical Renault will grasp the M&A nettle. If it doesn’t, (things could get) worse,” Thompson said.
German investment bank Nord LB believes Renault would be better off merging with PSA Group.
“We regard the PSA Group as the more natural fusion partner for FCA. We have been sceptical of Renault shares for quite some time and confirm our “sell” recommendation. At the same time we lower the price target to 45 euros,” Nord LB said in a research note.
In the early afternoon trading in Europe, Renault shares were down 11.75% at 48.42 euros.