June 13, 2019 / 11:14 AM / 2 months ago

Breakingviews - Fiat’s Renault offer was fairer than it looked

The logos of Renault and Fiat carmakers are seen in Nice, France, June 3, 2019. REUTERS/Eric Gaillard

By Liam Proud and Vincent Flasseur

LONDON (Reuters Breakingviews) - You don’t always know what you have until it’s gone. Renault investors who called Fiat Chrysler Automobiles’ 15.3 billion euro merger offer stingy will recognise this sentiment.

Fiat, chaired by John Elkann, pulled its 50-50 merger offer last week, citing “political conditions in France”. As well as meddling by the French government, the talks suffered from accusations that the Italian-American group’s plan undervalued the French carmaker. Activist fund CIAM said Elkann’s deal implied a negative value for Renault’s core business.

At face value that’s right. Renault’s 43% stake in Nissan Motor was worth 11.1 billion euros before Elkann’s approach. The group also has shares in Germany’s Daimler valued at 780 million euros. Its financing arm RCI Banque had a book value of 5.2 billion euros at the end of December. These add up to more than 17 billion euros. That implies Fiat’s proposal put a negative value of 1.8 billion euros on Renault’s main carmaking business.

Yet these simple sums need adjusting. Renault and Nissan’s alliance stops the French group from controlling its Japanese partner or selling its stake without permission. The tangible value from its shareholding is a regular stream of dividends, which will total 598 million euros this year, using Refinitiv estimates. Those payments are worth about 5.7 billion euros over the next 20 years, assuming no growth and applying a 10% discount rate.

Renault could sell its stake in Daimler, but would probably have to accept a discount to the market price. Assuming a 15% haircut , the holding is worth 663 million euros. Meanwhile, the fortunes of Renault’s financing arm are tied to the struggling auto sector, and European bank valuations are depressed. So a price tag of three-quarters of book value, or 3.9 billion euros, seems more realistic.

Deduct all these from Fiat’s offer and there’s 5 billion euros equity value left for Renault’s automotive operations, which generated 1.2 billion euros in earnings last year. Assume net income shrinks 1% in 2019 and the forward multiple is over four times.

That’s a lower valuation than Renault investors might have hoped for, but it’s not negative. It’s also similar to the multiple Fiat’s offer placed on its own operations. More importantly, a deal would deliver 5 billion euros of annual cost savings, shared equally between the two groups. That makes restarting merger talks a priority.

Click here for the merger calculator: tmsnrt.rs/2X0xioj

Breakingviews

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