GOLDING’S TAKE: Renault and Nissan: the next step is not Rennis but Nissault
How they laughed when Renault announced that it was going to run the then-bankrupt Nissan. City circles echoed to the snorts of derision. When so many other auto mergers had failed to generate value, how could two companies of such completely opposed cultures possibly get along together?
All of that instant analysis of course did not allow for the qualities of the now celebrated Carlos Ghosn. He had a reputation within Renault as a cost cutter but his contributions to the French company were actually secondary to the windfall of the strong pound in its principal export market and to the runaway success of the Renault Megane. He was by no means a safe pair of hands at the time of his appointment.
It's different today. Ghosn has an extraordinary reputation in Japan where he is feted as a corporate saviour and voted by the saucy female jeunesse of that country as the third most desirable inseminator.
Everybody is very happy about the events of the last six years. That's everyone except of course, the professional shareholders who are never satisfied and who want to know where the next trick is coming from. All would be well if anyone believed that the profitability of the two companies could push on from this point; but no-one does. Renault is making operating margins of 5.3%. No Westerner exclusively in the volume car sector does that for long. Nissan is making 10%.
Even allowing for the fact that Toyota is doing even better, there is little suggestion that the number two Japanese company can go further. Ghosn is still running it but from Paris now where he has also taken over as head of Renault.
So if we are in a world where car sales volume is static at best and where margins are at a peak how does a Renault or Nissan shareholder get a more valuable share at the end of the year.
Goldman Sachs thinks that the only possibility of another burst in the shares is a bid for Nissan (by Renault). Or better still, a bid for Renault (by Nissan).
The thought of Renault owning the whole of Nissan makes sense. It's fair reward for its high-risk investment in 1999. But the thought of the patient taking care of the doctor has overtones of the madhouse about it. What can the good people of Goldman Sachs be smoking?
Well, at stake - according to them - is a little matter of €6bn. That is the amount by which the value of the united enterprise could rise if a bid for Nissan was successful. It could offer a premium to the present Renault share price for the 85% of equity it does not own, cancel Renault's 44.4% holding in Nissan and lift the earnings per share by 10%.
Put simply, Renault has done too good a job on Nissan to be able to afford to buy it any more. Renault is worth €20bn. To buy the 55.6% of Nissan it does not own it would have to raise debt of €20bn or issue shares to about the same value which would absolutely flood the market for auto equity.
The emergence of Nissault though would create all sorts of dangers. Goldman Sachs describes the present "effective control" shareholding arrangement between the two companies as Byzantine in its complexity. For Ghosn though, the prospect of disturbing the perfect poise of the present Renault-Nissan working relationship is fraught with danger.
It's a worry for him. If he confronts shareholder pressure to release the €6bn of implied value and refuses to do it, and if the share price stays flat or goes down, his reputation will suffer. It's going to be a fun one to second-guess.