Analysis-Renault cuts Nissan stake, shedding conglomerate discount may be tougher

By Gilles Guillaume and David Dolan

LONDON/TOKYO (Reuters) – Renault SA has taken big steps to simplify its complicated alliance with Japan’s Nissan Motor Co, but still faces a tough road ahead to escape the conglomerate discount that has long dogged its shares.

The retooled agreement, details of which were announced at a presentation in London on Monday, will see Nissan investing in a stake of up to 15% in Renault’s new electric vehicle unit, Ampere.

Renault, as previously announced, will cut its Nissan stake to 15% from around 43% now. Crucially, Nissan will gain voting rights for its 15% of Renault, rectifying an imbalance that had long caused discontent at the Japanese company.

The new set-up would allow Renault to operate like “a normal company,” CEO Luca de Meo said at the presentation, where he was flanked by Nissan CEO Makoto Uchida and the head of junior partner Mitsubishi Motors Corp.

While Renault bailed out Nissan more than two decades ago, it is the smaller automaker by sales. The lopsided nature of that relationship has been highlighted by the conglomerate discount investors have put on Renault’s shares – valuing the French group at times as worth even less than its Nissan stake.

“In theory, the valuation discount should benefit from the stabilisation of Renault’s operating performance,” said Philippe Houchois, automotive analyst at Jefferies.

Analysts had long struggled to estimate the fair value of Renault, given that the company was a patchwork of automotive and banking assets, as well as the Nissan stake.

With a price/earnings ratio for the stock of 4.4 times, Renault lags the European car and parts index.

The roughly 43% stake in Nissan is worth around $6.5 billion. That’s a little more than half of Renault’s market capitalisation of around $12.4 billion, according to Refinitiv data.

During the financial crisis in 2008 Morgan Stanley estimated the market’s intrinsic valuation of Renault’s shares – including its stakes in Nissan and Daimler – at zero. Once the value of its financing unit was stripped out, the shares were estimated at a negative value of 17 euros apiece.

Graphic: Renault’s shares undervalued by market- https://fingfx.thomsonreuters.com/gfx/mkt/myvmokbwnvr/renault%20price.PNG

DECISION-MAKING

Renault’s stock, like Nissan’s, also came under pressure following the ouster of the alliance’s founder, former chairman Carlos Ghosn, in 2018.

The fall-out from Ghosn’s arrest on financial misconduct charges – he later fled to Lebanon where he still resides and says he is innocent – further strained the alliance and brought decision-making to a standstill.

“Everyone reproached us for having a quantity of money tied up in a system where we could not decide anything,” said a source close to Renault.

The new agreement will eventually allow Renault to sell the Nissan stake – worth some 3.8 billion euros ($4.1 billion) – and see a huge windfall while keeping the alliance going, the source added. For the time being, Renault will put the shares in a French trust and continue to take dividends.

Renault also aims to list Ampere this year, which sources have said could be valued at up to 10 billion euros. But on Monday de Meo declined to give a valuation for the unit, saying it was up to the market to do so.

While Nissan halted some of its dividend payments in recent years because of its own financial pressure, its dividends have historically been a big boost for smaller Renault.

Neither company has been a stand-out stock. During the alliance’s 24 year history, Nissan’s shares returned 86%, when including dividends, while Renault’s more than doubled, according to Refinitiv. Stripping out dividends leaves Nissan with just a 2% gain and Renault with a 14% advance.

Some analysts who followed Renault had long advocated either a Renault-Nissan merger, or a full separation, to make the relationship clearer.

Ratings agency Moody’s has said that Renault, by selling down its Nissan stake and getting its partner to invest in Ampere, could unlock considerable value that would allow it to pay down debt and improve capital allocation.

The French automaker has around 39 billion euros in net debt on its balance sheet, according to Refinitiv.

Its return on equity (ROE), a measure of profitability, is only around 2%, compared to 5% for Nissan and 11% at Toyota Motor Corp.

Whether that ROE will improve could depend on the alliance’s ability to function better in the future. So far, the track record has not been great.

“It has always been very difficult to get them to work on anything jointly,” said Christopher Richter, deputy head of Japan research at brokerage CLSA, ahead of Monday’s announcement.

Graphic: Renault’s market cap vs rivals- https://fingfx.thomsonreuters.com/gfx/mkt/zdvxdnqwnvx/Renault%20market%20cap.PNG

($1 = 0.9285 euros)

(Reporting by Gilles Guillaume, Daniel Leussink and David Dolan; Editing by Mark Potter)