A Renault-Nissan merger has never been in itself a reason to own Renault. However, the probability of a government stake sale looks to be the highest for some time. Although not our base case, we see +20-30% upside, only adding to Renault’s optionality.
Is the probability of a full merger increasing?
The French government’s road block on a potential Renault-Nissan merger may soon be lifted. A sale of its 4.7% stake in the coming months could be the first stepping stone in the French government ending its 70-year involvement in Renault. With a seemingly pro-business president in place, the probability of a full government sell down looks to be the highest for some time, leaving the Alliance free to optimise its shareholder structure.
How could a combination work? How does it create value?
In this note we model 3 scenarios for how a potential merger may mechanically play out, showing that there is potentially 20-30% upside from combining the shareholder structure. The upside is not obvious at first, with the combined entity already trading at c.5.5-6x P/E - not notably cheap vs. peers GM, VW etc. However we believe a re-rating closer to 7x can be justified if sufficient new synergy targets accompany any announcement. As we have seen with PSA in the wake of the Opel deal, P/E is not the constraining factor given the promise of future synergies. The cleanest solution (with the most upside) would be for Nissan to buy the French government’s 15% stake before then merging with Renault.
When could it happen?
We expect the government first sells down the temporary 4.7% stake it built in 2015. Although the government can realise a profit if sold today (breakeven is EUR84 per share inc. dividends), it may wait until after the AGM on June 15th or until the 2016 dividend is paid on June 21st – not to mention the outcome of the French fraud investigation. This then leaves greater emphasis on the Alliance mid-term strategic presentation in October, where we expect Renault and Nissan to outline their coming 5 year plans – with the added optionality of any structural change.