Renault FCA Merger News - Fiat Chrysler Backs Off From Merger Proposal to Groupe Renault - Buh-Bye, Au revoir, Ciao

Bloomberg Renault FCA Merger Report

According to Bloomberg and Automotive News Fiat Chrysler's proposal last week for a 50-50 combination is designed to help the companies add scale, share costs and boost resources for tackling an expensive shift to electrification and autonomous driving.

They went on to report that longtime Renault partner Nissan has put up some resistance, while Renault's most powerful shareholder -- the French government -- has outlined a list of demands on jobs and a board seat.

LMC Automotive Client Alert
Proposed Merger of FCA and Renault

• Reports that Fiat Chrysler Automobiles (FCA) and Renault are in talks relating to a full merger have now been confirmed by both parties.
• LMC Automotive believes that there is a strong commercial and strategic logic for pursuing such a merger.
• Read our full report on what this means for the future of the companies and the automotive industry as a whole.

FCA Submits Proposal For A Transformative Merger With Groupe Renault To Create Preeminent Global Automotive Group

• Combined business to be 50% owned by FCA shareholders and 50% by Groupe Renault shareholders – balanced governance structure and majority of Board of Directors being independent
• Combination would create the 3rd largest global OEM with 8.7m vehicle sales and a strong market presence in key regions and vehicle segments
• Broad and complementary brand portfolio would provide full market coverage, from luxury to mainstream
• Combined company would be a world leader in the rapidly changing automotive industry with a strong position in transforming technologies, including electrification and autonomous driving
• No plant closures as a result of the combination
• In excess of €5 billion estimated annual run rate synergies incremental to existing Renault-Nissan-Mitsubishi Alliance (Alliance) synergies
• Strong combined balance sheet allowing for flexible capital allocation and robust dividend policy
• Significant benefits to the other Alliance partners including ~€1 billion of additional estimated run rate synergies

May 27, 2019:

Fiat Chrysler Automobiles N.V. has today delivered a non-binding letter to the Board of Groupe Renault proposing a combination of their respective businesses as a 50/50 merger.

The FCA proposal follows initial operational discussions between the two companies to identify products and geographies where they could collaborate, particularly as they develop and commercialize new technologies. These discussions made clear that broader collaboration through a combination would substantially improve capital efficiency and the speed of product development. The case for combination is also strengthened by the need to take bold decisions to capture at scale the opportunities created by the transformation of the auto industry in areas like connectivity, electrification and autonomous driving.

The proposed combination would create a global automaker, preeminent in terms of revenue, volumes, profitability and technology, benefitting the companies’ respective shareholders and stakeholders. The combined business would sell approximately 8.7 million vehicles annually, would be a world leader in EV technologies, premium brands, SUVs, pickup trucks and light commercial vehicles and would have a broader and more balanced global presence than either company on a standalone basis.

The benefits of the proposed transaction are not predicated on plant closures, but would be achieved through more capital efficient investment in common global vehicle platforms, architectures, powertrains and technologies. FCA has a history of successfully combining OEMs with disparate cultures to create strong leadership teams and organizations dedicated to a single purpose. Therefore, FCA’s Board strongly believes that this combination, which would have the scale, expertise and resources to navigate the rapidly changing automotive industry, would create new opportunities for employees of both companies and for other key stakeholders.

Under the terms of the proposal, shareholders in each company would receive an equivalent equity stake in the combined company. The combination would be carried out as a merger transaction under a Dutch parent company. The Board of the combined entity would initially be composed of 11 members, with the majority being independent and with equal representation of four members each for both FCA and Groupe Renault, as well as one nominee from Nissan. Further, there would be no carryover of existing double voting rights. However, all shareholders would have the opportunity to earn loyalty voting rights from the completion of the transaction under a loyalty voting program. The parent company would be listed on the Borsa Italiana (Milan), Euronext (Paris) and the New York Stock Exchange.

The benefits flowing from the combination of the two businesses would be shared, 50% by current FCA shareholders and 50% by current Groupe Renault shareholders. Before the transaction is closed, to mitigate the disparity in equity market values, FCA shareholders would also receive a dividend of €2.5 billion (see Appendix). In addition, prior to closing, there would be a distribution of Comau’s shares to FCA’s shareholders or an incremental €250 million dividend if the Comau spin-off does not occur.

Combining the businesses will bring together complementary strengths. The combination would create a brand portfolio that would provide full market coverage with a presence in all key segments from luxury/premium brands, such as Maserati and Alfa Romeo, to the strong access brands of Dacia and Lada, and would include the well-known Fiat, Renault, Jeep and Ram brands as well as commercial vehicles. Groupe Renault has a strong presence across Europe, Russia, Africa and Middle East, while FCA is uniquely positioned in the high margin segments in North America and is a market leader in Latin America. FCA’s evolving capability in autonomous driving, which includes partnerships with Waymo, BMW and Aptiv, is complemented by Groupe Renault’s decade of experience in EV technology where it is the highest selling EV OEM in Europe. Groupe Renault also has a well-established and profitable financing business (RCI Banque).

The combination would be highly value accretive for both FCA and Groupe Renault shareholders, delivering in excess of €5 billion of estimated annual run rate synergies, incremental to existing Alliance synergies. These synergies would arise principally from the convergence of platforms, the consolidation of powertrain and electrification investment and the benefits of scale. FCA estimates based on its experience, that approximately 90% of synergies would come from purchasing savings (~40%), R&D efficiencies (~30%), and manufacturing and tooling efficiencies (~20%). Included in these estimated savings would be the potential to reduce the combined number of vehicle platforms by approximately 20% and engine families by approximately 30%. The full run rate of estimated synergies is expected to be achieved by the end of year six following closing, with about 80% achieved in year four. Taking into account the impact of the approximately €3-4 billion in cumulative implementation costs, it is estimated that the synergies would be net cash flow neutral in year one and positive from year two onward.

Geographically, based on FCA and Groupe Renault’s 2018 global sales, the combined company would be #4 in North America, #2 in EMEA and #1 in Latin America and would have the increased resources necessary to grow its footprint in the APAC region. On a simple aggregated basis of 2018 results, the combined company’s annual revenues would be nearly €170 billion with operating profit of more than €10 billion and net profit of more than €8 billion.

While the proposal focuses on a combination of FCA and Groupe Renault, FCA looks forward – as part of a combined enterprise with Groupe Renault – to working with Groupe Renault’s Alliance partner companies on ways to create additional value for all Alliance members. FCA recognizes the standing and achievements of Groupe Renault’s partners and sees significant expected benefits to all parties from the expanded partnership. The FCA and Groupe Renault combination together with its Nissan and Mitsubishi partners would be the largest global OEM alliance, selling more than 15 million vehicles annually. The additional synergies stemming from the merger of FCA and Groupe Renault that are expected to accrue to Nissan and Mitsubishi purely as members of the Alliance are estimated to be worth an incremental €1 billion annually.

This proposal offers the opportunity to create the #3 global automotive company with broad, complementary and strong brand and geographic presence and important strengths in transforming technologies. It also confirms and enhances the value of the existing Alliance and its potential to become even stronger in the future. While there is no certainty that this proposal will result in a transaction, the Board of FCA has strongly supported and approved the proposal which will now be reviewed by the Groupe Renault Board of Directors. The definitive agreements for the proposed combination are subject to negotiation and to final review and approval by the FCA and Groupe Renault Boards. Completion of the proposed combination would also be subject to customary closing conditions, including approval by each company’s shareholders, as applicable, and the satisfaction of antitrust and other regulatory requirements.

Information related to the proposal will be made available from time to time on the FCA website (https://www.fcagroup.com/en-US/Pages/home.aspx).

FCA-Renault megamerger is born of desperation says Bloomberg

Chris Bryant writing for Bloomberg reported that when the U.S. auto industry was looking down a barrel in 2008, General Motors did the unthinkable and quietly proposed a merger with cross-town rival Ford Motor Co.

It didn’t happen – GM ended up filing for Chapter 11, while Ford managed to avoid a bailout. But the fact they even broached the matter spoke volumes about the pressures the Detroit 3 rivals were under.

Now Europe’s auto industry has its own pause-and-gasp-for-breath equivalent. On Monday, Fiat Chrysler Automobiles said it hopes to merge with France's Renault to form the world’s third-largest carmaker (or by far the largest if you include Renault’s alliance partner Nissan, which arguably one should).

There are attractions in collaboration, but this merger proposal goes well beyond a more limited alliance or partnership. So why is Fiat’s billionaire chairman John Elkann taking such a big risk?

Unlike their U.S. counterparts in 2008, neither Fiat nor Renault are unprofitable or facing imminent collapse. But both face painful industry upheaval: car sales are slowing, just as the costs to develop electric vehicles and comply with ever-stricter emissions targets are surging. Fiat thinks the answer is to achieve huge scale and thereby share the financial burden in meeting those challenges. Is it?

Due to its limited financial resources, Fiat is a laggard in EVs while Renault is an acknowledged leader. But thanks to its acquired Jeep and Ram brands, Fiat has a very profitable truck and SUV business in North America. By contrast, Fiat’s European operations are hardly profitable, which may explain why it picked Renault as a potential merger partner over Peugeot SA, whose sales are more heavily skewed towards Europe.

Cost savings?

Then there are the cost and investment savings, which Fiat estimates could total 5 billion euros ($5.6 billion) annually.

There are reasons to be skeptical about that figure. No factory closures are planned, which is typically one of the quickest and most painful ways to slash expenses. Instead, the savings are expected to come from common purchasing, shared vehicle platforms and r&d.

Factoring the lengthy timespan the synergies will take to achieve, plus integration costs, and that headline figure might be worth only about 3.5 billion euros of value creation to each side, by my rough calculations.

Before today, both companies were valued at just 4 times estimated earnings -- poor even by the standards of the auto industry. Doubtless, the merged entity would hope to enjoy a stock market re-rating which might improve the financial benefits of a deal to about 5 billion euros for each side.

For all that promise, Fiat and Renault each gained only about 2 billion euros of market value on Monday in European markets. That discount doubtless reflects the risk that the deal may not happen or deliver the promised benefits.

Governance risks

Merging the two companies would create huge complexity and governance risks that the promised large slate of independent board members might still struggle to alleviate.

Neither side was likely to countenance being the junior partner in a tie-up. It’s fortunate, then, that Fiat and Renault’s market capitalization weren’t all far apart, so a merger of equals is possible, at least on paper. The slight valuation disparity would be offset by a cash payment to Fiat shareholders.

But mergers of equals rarely work, and automotive M&A especially has a poor track record. Fiat’s acquisition of Chrysler was a success, but Daimler’s earlier acquisition of Chrysler was a disaster.

It’s odd that Fiat has pitched a merger while Renault is in a tussle with its alliance partner Nissan. Perhaps the Japanese will view this as a helpful distraction that will stop Renault’s managers trying to deepen their alliance for the time being. A merger with Fiat would also dilute the influence of the French state, which currently holds 15 percent of Renault’s shares and even more of the voting rights.

However, it’s also possible Nissan will see this is an attempt to swing the weight of the Renault-Nissan alliance even more toward Europe. As with the alliance, politics presents a huge challenge to this merger. Expect France and Italian interests to battle for every cent of investment spending. If job cuts become a necessity, things could get even more tense.

But politics also explains why this deal is even being discussed. By demonizing diesel vehicles while clamping down on carbon emissions, governments have backed carmakers into a corner. As in 2008, this is what happens when an industry gets desperate.

Renault’s Board of Directors To Consider FCA 50/50 Merger (Of Equals Of Course)

Boulogne-Billancourt, Mai 27th, 2019 – Renault’s Board of Directors met today to examine the proposal received from FCA (Fiat Chrysler Automobiles) regarding a potential 50/50 merger between Renault S.A. and FCA.

After careful review of the terms of FCA’s friendly proposal, the Board of Directors decided to study with interest the opportunity of such a business combination, comforting Groupe Renault’s manufacturing footprint and creating additional value for the Alliance.

A further communication will be issued in due course to inform the market of the results of these discussions, in accordance with applicable laws and regulations.

***

About Groupe Renault

Groupe Renault has manufactured cars since 1898. Today it is an international multi-brand group, selling close to 3.9 million vehicles in 134 countries in 2018, with 36 manufacturing sites, 12,700 points of sales and employing more than 180,000 people.

To address the major technological challenges of the future, while continuing to pursue its profitable growth strategy, Groupe Renault is focusing on international expansion. To this end, it is drawing on the synergies of its five brands (Renault, Dacia, Renault Samsung Motors, Alpine and LADA), electric vehicles, and its unique alliance with Nissan and Mitsubishi Motors. With a 100% Renault owned team committed to the Formula 1 World Championship since 2016, the brand is involved in motorsports, a real vector for innovation and awareness.

Russian Federation : FCA and Renault have announced preparations for a merger

May 28, 2019; The Renault group issued a press release in which it confirmed receipt from FCA (Fiat Chrysler Automobiles) of a merger proposal on the condition of holding equal shares. If a positive decision is taken, the newly formed automaker can save up to five billion euros annually from cooperation. Merging with Renault will strengthen the position of brands during the period of large-scale transformation of the industry, and also make it possible to reach all market segments, from mass to premium. If FCA enters the Renault-Nissan alliance, this will greatly affect the position of the Japanese brand, as 10 of the 11 seats on the board of directors will be occupied by representatives of FCA and Renault, writes Automotive News Europe . Against the background of the arrest of Carlos Gona and the general tension, this may lead to even greater discord between the leadership of Renault and Nissan.

World sales of the Renault group in 2018 amounted to 3,884,295 vehicles, FCA - 4,650,000 vehicles. Cumulative sales of Renault, Nissan and Mitsubishi - 10.76 million cars and commercial vehicles. The closest competitor - Volkswagen Group - sold 10.83 million vehicles in the same period. It is possible that the merger will give Renault access to the North American market, where FCA positions are still strong, while the Italians will be able to try to recover in Russia - the second largest market for the French automaker. FCA will also get access to electric technologies - this will speed up the electrification of the line, as for this indicator the concern is still lagging behind its competitors.

In March, one of the three largest shareholders of the PSA group, the Peugeot family, said it was ready to support a takeover or merger with Fiat Chrysler Automobiles. Such a partnership would help strengthen the position of the group in North America, mainly through the Jeep and RAM brands, and in light of the restarting of Peugeot in the United States would provide access to an extensive network of dealer centers and service stations.

Blindsided by FCA-Renault talks, Nissan risks being left by the roadside

TOKYO/BEIJING MAY 28, 2019; Naomi Tajitsu and Norihiko Shirouzu writing for Reuters reported that Nissan found out about Renault’s merger talks with Fiat Chrysler just days before they became public, four sources told Reuters, stoking fears at the Japanese carmaker that a deal could further weaken its position in a 20-year alliance with Renault.

Nissan Motor Co Chief Executive Hiroto Saikawa likely first caught wind of the merger plan through his own chief operating officer, Yasuhiro Yamauchi, who also serves on Renault’s board, one of the sources said, speaking on condition of anonymity due to the sensitivity of the matter.

Saikawa’s actual notification from Renault most likely came a day ahead of a report over the weekend that the French company was in tie-up talks with Italian-American rival Fiat Chrysler Automobiles (FCA), the source said.

The plan, which would create the world’s third-largest automaker, raises difficult questions about how Nissan would fit into a radically changed alliance. Renault Chairman Jean-Dominique Senard arrived in Japan on Tuesday to discuss the proposed tie-up - and presumably to try to smooth over ties.

But the deal poses an additional challenge for Saikawa, already grappling with poor financial performance and an uneasy relationship with Renault after Nissan led the ousting last year of long-standing alliance chairman Carlos Ghosn.

“All this put Saikawa under massive pressure,” a second source said, referring to the fact that negotiations caught the CEO and senior management off guard.

Renault, which owns a 43.4% stake in Nissan, had previously angled for a merger with Nissan, but Saikawa has long opposed a full integration. [nL5N22Q90O]

New vehicle and powertrain platforms developed by FCA-Renault could also pose a dilemma to Nissan, challenging its jealously guarded independence in some areas of engineering, research and development.

Nissan could find itself forced to choose between technology developed elsewhere or going it alone - between scale without autonomy and autonomy without scale, a source close to the Renault board said.

FCA has said a deal would embrace Nissan and another alliance member, Mitsubishi Motors, as “valued and respected partners”.

“I have huge respect for Nissan and Mitsubishi, and their products and businesses,” FCA Chairman John Elkann told the Nikkei.

Still, there is awareness of friction between Renault and Nissan, which is perhaps why the Japanese company was not involved in talks at an earlier stage.

“The relationship between Renault and its Japanese partners is not as constructive as probably anybody wishes,” said a source familiar with the FCA-Renault talks.

“The FCA view is that Nissan has a lot on its plate ... So the time is not right to consider anything other than enhanced cooperation.”

‘A STRONG SIGNAL’

The French government, which owns shares in Renault, said on Tuesday it wanted Nissan to be on board with the deal.

But there have long been tensions between Paris and Tokyo over the imbalance of power in the carmaking alliance, with Nissan holding only a 15% non-voting stake in Renault.

The Japanese automaker’s clear advantage is in its technology, including vehicles that meet China’s tougher emissions regulations. Renault and FCA, therefore, would need Nissan to help them meet increasingly tough fuel economy, emissions and electric vehicle (EV) quotas around the world.

An FCA-Renault tie-up would also raise questions about how to extract synergies in some markets where Nissan and FCA compete, such as in North American trucks and SUVs.

The Japanese firm’s line-up of Nissan and Infiniti brand SUVs competes with FCA’s Jeep models such as the Cherokee. Nissan’s Titan pickup is also competitor, albeit a weak one, to FCA’s Ram pickup line.

The fact Renault is prepared to consider creating such challenges may be a sign of its frustration with Nissan’s reluctance over a full merger.

“It sends a strong signal that Renault does not necessarily have to tie its fate to Nissan,” said Chris Richter, senior research analyst at brokerage CLSA, about the proposed FCA-Renault tie-up.

Saikawa told reporters on Tuesday that “strengthening the alliance and constructive discussions are forward looking, and we are open to constructive discussions,” according to Japanese broadcasters.

But unless Nissan can regain the initiative, it risks being marginalized even more.

“If the Renault-Fiat merger happens and the status quo continues at Nissan-Renault, Nissan’s position and influence within the alliance will fall behind Fiat,” said Takeshi Miyao, managing director of consultancy Carnorama.

Bernstein analyst Max Warburton said there were theoretically stronger synergies for Renault with FCA than with Nissan, and a better cultural fit too.

“It may be inevitable that Renault eventually exits Nissan,” he said, adding the French company’s stake in its Japanese partner was currently worth about 11 billion euros - “plenty of capital to spend on EVs and new technology.”

Reporting for Reuters by Naomi Tajitsu and Maki Shiraki in Tokyo, Norihiko Shirouzu in Beijing Laurence Frost in Paris, Giulio Piovaccari in Milan, Joe White in Detroit; Editing by David Dolan and Mark Potter