Nissan Warming to FCA-Renault Merger, But Investors So Far Chill
David Kiley
Nissan is warming to the FCA merger proposal to Renault, and important development given Nissan's stake in Renault and Renault's stake in Nissan.
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Forbes
A week after Fiat Chrysler pitched a merger to Renault, the French automaker's existing partner, Nissan, is warming to the idea of a global alliance that includes the owner of Jeep, Fiat, Alfa Romeo and Maserati.

One of Reuters auto writers this morning cited and unnamed source reporting that the Japanese automaker is on board providing they can protect some proprietary technology connected to electric-vehicle technology. One of the other provisions cited by Reuters is the idea that Nissan would want to up its stake in Renault from 15% to have more say in the alliance going forward.

Before FCA made its pitch, Nissan was already in tense negotiations with Renault over their existing alliance. The chief executive and architect of that alliance, Carlos Ghosn, has been in a Japanese detention center since last November, and he awaits trial for several financial crimes. Ghosn's incarceration was spurred by Nissan executives who exposed him to Japanese prosecutors. The Renault executive had long chafed Nissan executives who felt they were being undervalued by Ghosn, and that the alliance was lopsided as Nissan is much bigger than Renault.

While the FCA deal theoretically gives Renault leverage in cutting a new deal with Nissan, the Japanese automaker must realize that here are few options for it in terms of cutting a different alliance. Moreover, as Renault owns 44% of Nissan, the French company has a lot to say about who Nissan aligns with.

In truth, an FCA, Renault, Nissan, Mitsubishi tie-up is a formidable one if the executives at those companies can create a structure in which they maximize the opportunity to share purchasing, vehicle platforms, engines, electric drivetrains, self-driving technology. FCA's late CEO Sergio Marchionne chased an alliance just like this for a decade. It took the jailing of Carlos Ghosn to create the opportunity. Though it is worth noting that Nissan executives said that Ghosn, more than a year ago, told executives to study the benefits of adding FCA to the Alliance. That was around the time that Marchionne died unexpectedly.

Nissan's chief executive Hiroto Saikawa said Monday, "I believe that the potential addition of FCA as a new member of the alliance could expand the playing field for collaboration and create new opportunities for further synergies." Saikawa continued, "That said, the proposal currently being discussed is a full merger which—if realized—would significantly alter the structure of our partner Renault. This would require a fundamental review of the existing relationship between Nissan and Renault," Saikawa said, adding that Nissan would analyze and consider its "existing contractual relationships."

Nissan is not the biggest hurdle to clear to make the FCA renault deal happen. It's the French government. There are obvious synergies and savings to be had by melding Fiat and Renault small and mid-sized car platforms, engines, architectures, purchasing, back office functions, etc. But the French government, which owns a stake in Renault, is all about protecting jobs, not losing them to Italy. FCA is in process of making job protection guarantees to the French. But those guarantees could hinder the fair valuation of the deal for all shareholders.

FCA shares have been hammered since January of 2018, falling 50% in that period. The auto sector in general has not been favored by investors, but FCA's decline has been the worst in the industry in that time. FCA management and investors are looking for a reward for this merger if it is completed. Management is going to have to outline a significant strategy of growth and cost savings if shareholders are going to applaud the deal.

FCA shareholders have a right to be frustrated. The Jeep brand alone is worth more than the current street value of the entire company, according to most industry analysts. The challenge to management is creating value out of the entire rest of the company.