If it didn't already exist, nobody of sound mind would invent the current Renault-Nissan Motor alliance. The only sensible financial arrangement between the French and Japanese carmakers is a full-blown merger. That looks unlikely for now.
The arrest in Japan of Carlos Ghosn, who ran the alliance and Renault while also chairing Nissan Motor, revealed how dysfunctional the 20-year-old partnership has become. Nissan Chief Executive Hiroto Saikawa found his former boss under-reported his salary and misused company assets, according to an internal report. The 28 billion euro Japanese group swiftly ousted Ghosn, while Renault merely appointed interim replacements.
Nissan's directors are understandably disgruntled. The company's non-voting 15 percent Renault stake is dwarfed by the French group's own 43 percent holding in Nissan - a result of Nissan's weak financial position when Renault, which also counts the French state as a shareholder, bought shares in the late 1990s. Since then, Nissan has become the dominant partner in economic terms: it contributed about 60 percent of combined R&D between 2013 and 2017, and two-thirds of revenue.
One solution is a rebalanced alliance. Neither party has an interest in separation, since that'd mean losing out on targeted annual synergies of 10 billion euros by 2022. It would take years to recreate similar economies of scale with another partner. The French side could defuse things by selling some of its holding back to Nissan or allowing the Japanese group to raise its own stake in Renault. Nissan would have more of a say, and its directors would be less paranoid about being under the thumb of French government bureaucrats.
Yet from a financial perspective, that would be little better than the current arrangement. Companies with giant cross-shareholdings typically incur hefty stock-market discounts. That's particularly true for 16 billion euro Renault. Its shares in Nissan are worth 13 billion euros, leaving little value for the main car business and highly profitable auto-finance arm.
That's because investors apply a haircut to Renault's Nissan stake: it can't offload the shares without moving the market or risking a breakdown of the alliance, while a 2015 agreement between the parties effectively stops the French group exerting control.
The same logic for a discount applies to the Japanese group's reciprocal holding, though its smaller size makes the problem less acute. Nor does it make sense for either party to have so much capital tied up in another company's shares at a time when carmakers face rising investment requirements for electric and autonomous vehicles.
Better to lift the discount entirely by merging. Shareholders would be much better off - though getting a precise number is tricky since current prices entail overlapping claims on the others' earnings. The safest method is to disentangle their earnings, value the pair separately and add them together.
On the average forward-earnings multiple fetched by European rivals like Peugeot SA, Fiat Chrysler Automobiles , Daimler, BMW and Volkswagen, Renault's equity would be worth 12.6 billion euros. That's using Deutsche Bank's 2.4 billion euros 2019 earnings estimate excluding income from Nissan.
Nissan uses a different financial year, but should report about 4.5 billion euros in profit over the four quarters that make up 2019, Refinitiv data shows. Strip out roughly 360 million euros to cover its income from the 15 percent Renault stake, and the core unit's earnings would be just under 4.2 billion euros. On the average forward multiple of Toyota Motor, Honda Motor, General Motors and Ford Motor, its equity should be worth 29 billion euros.
That means Renault-Nissan combined is worth almost 42 billion euros - before accounting for any further post-merger cost savings - compared with a current joint value of 29 billion euros, once cross-holdings are removed to avoid double counting. That implies a near-13 billion euro gain for shareholders from a full-blown marriage.
For shareholders, the chances of a windfall look remote. The Japanese side seems opposed to a deal that leaves the French state a large shareholder; simply merging the two groups together at market prices would leave the government with a 7 percent stake. Ghosn's ousting may even have been designed to stop a deal, since he was the driving force for closer integration. Given recent civil unrest in France, President Emmanuel Macron would be reluctant to give up the state's influence, especially in a transaction that might lead to job losses.
There's a clearly-marked destination on the alliance's map. But Renault and Nissan are driving in the wrong direction. Nissan Chief Executive Hiroto Saikawa on December 17 said he hoped French partner Renault listens to the Japanese carmaker's explanation of alleged financial misconduct by its former Chairman Carlos Ghosn.
Saikawa said the company did not have a deadline in mind on when to name a successor to Ghosn, and that he had asked a special governance committee to consider whether the CEO and chairman positions should be held by one person. Nissan's board ousted Ghosn as chairman days after his arrest. Yet Renault's board at a December 13 meeting reiterated its decision to keep him in office at the French group. Renault directors have yet to be given access to Nissan's findings, Reuters reported. The findings are being held by Renault lawyers.