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People and MarketsComment

Renault-Fiat: patience is a virtue

Fiat Chrysler spent five months trying to seal a deal with Renault — and then ran out of patience in five days. Either the deal is weaker than it looks, or Fiat's John Elkann should take a deep breath, practise smiling and try again.

John Elkann, chairman of Fiat Chrysler Automobiles, has put the blame on France for the failure of his plan to merge FCA with Renault. Commentators have been quick to jump on the bandwagon, painting this as a battle between go-getting free enterprise and a dinosaur French state. That is a caricature and misses the real possibility for the deal to be resumed in future.

In a terse statement on June 6, FCA said “it has become clear that the political conditions in France do not currently exist for such a combination to proceed successfully”.

Renault responded shortly afterwards with a statement expressing its “disappointment not to have the opportunity to continue to pursue the proposal of FCA”.

Both sides were super-appreciative of each other, and careful to thank Nissan and Mitsubishi, the Japanese partners umbilically linked to Renault through mutual shareholdings, for their “constructive approach”.

The implication was: only France had got in the way of the deal.

Fiat, and specifically Elkann, appear to have run out of patience with the French government. Its 15% stake in Renault, which, as a long term holding, comes with double voting rights, makes its acquiescence to a deal all but indispensable.

However, the French foot-dragging narrative appears an unfair or incomplete account — and France may have very good reasons for caution.

Long gestation

Fiat reportedly began talking to the government at the end of last year, and spent two months working with it on the deal before opening detailed talks with Renault’s chairman Jean-Dominique Senard.

Senard had taken over in January when Carlos Ghosn, mastermind of Renault for the past 22 years, had had to resign as chairman and CEO after his arrest in Japan for alleged financial improprieties in November 2018. Ghosn has spent most of the time since then in a Japanese prison.

The Fiat-Renault negotiations climaxed during the 11 day period during which the talks were public, from May 27 to June 6.

This was the time when Senard had to steer the agreed deal through the board. The terms were simple to understand — a 50-50 merger of equals after Fiat shareholders had received a €2.5bn special dividend to compensate them for Fiat’s higher market value.

The prize was €5bn of annual synergies, which FCA thought it could extract by the sixth year after completion, at a cumulative cost of €3bn to €4bn. That sounds a lot to achieve, considering FCA said it would not close plants. But set against the two groups’ combined annual costs of €160bn, it looks more modest. Achieved, it would add 50% to their €10bn joint operating profit in 2018.

FCA estimated 40% of the savings would come from purchasing power; 30% from research and development efficiencies and 20% from manufacturing and tooling efficiencies.

The number of vehicle platforms — essentially, cores of cars — would have been reduced by a fifth and the number of engine families by 30%.

The stockmarket's reaction to the deal has been muted. Renault's share price rose 14% on its announcement and fell 6% on its cancellation. Fiat's climbed about 8% and barely budged on the rupture.

Four conditions

At the board negotiations, France’s finance minister Bruno Le Maire set four conditions: that the deal could be done within the framework of the Renault-Nissan alliance; that jobs and factories in France would be preserved; governance that respected the balance between Renault and FCA; and the merged group’s participation in an electric battery initiative with Germany.

All but the first of these conditions were met.

The deal-breaker for Fiat was Le Maire’s insistence that Renault’s board should have five extra days to consider the deal. He planned to use the time to secure the explicit support of Nissan, which also holds 15% of Renault, though without any voting rights.

France and Nissan each hold two seats on Renault’s 19 member board, and France believed Nissan’s directors were planning to abstain when the board voted on the deal.

Le Maire had to decide: did that mean Nissan had serious reservations about the transaction — potentially imperilling the 20 year old alliance?

To risk breaking up a partnership that has worked very well for Renault, and around which its whole strategy has been built, for the sake of a new, untested proposal was a huge step to take.

The Renault-Nissan-Mitsubishi alliance inevitably creaks with tensions, but all the parties appear committed to continuing it, and exploring ways to strengthen it.

Early last year, Ghosn was promoting an idea for Nissan to buy most of the French government stake. France and Nissan appear both to have been unwilling, and Renault shares fell in March 2018 when this became clear. But the exploration of various ideas for the alliance has continued.

Strong governance vital

Financial specialists may scoff at governments owning stakes in businesses. But France’s stake in Renault — wholly state-owned until 1994 — is a central part of the group’s governance.

It is not self-evidently any more wrong than Fiat being controlled — with 29% of the shares and 42% of voting rights — by Exor, a holding company 52% owned by the Agnelli-Elkann family.

Renault has €57bn of revenue and 180,000 employees. It is right for the state to take its responsibility as guardian of this vital industrial group seriously. Its perspective should not be lampooned as that of a socialist reactionary.

Had the French government hated FCA’s proposal, it could have used many other opportunities to refuse. Instead, it engaged with FCA and got all the way to the brink of a deal. Its four conditions — including the support of Nissan — are transparent and reasonable.

Since Fiat walked away, Le Maire has made overtures to Nissan about strengthening the alliance and said he is willing to reduce the French stake if that helps. Nissan reportedly wants a full exit by France.

Why so rash?

On Fiat’s side, there are questions to be answered, too. If the merger is as compelling and transformational an idea as FCA has argued, why did Elkann bin it just because France asked for five more days to talk to Nissan?

FCA has its own problems to deal with just now, including a lawsuit from Reid Bigland, its head of US sales, who claims his compensation was docked for whistle-blowing.

But there must be a suspicion that Elkann knew the French condition could not easily be met. The deal was a big step into the unknown for Nissan, and convincing its management — rocked by the Ghosn scandal — to fully endorse FCA’s proposal could have proved difficult, even though Nissan appears to have seen potential in the deal.

The Japanese partners have long been unhappy with the balance of power in the relationship: Renault owns 43% of Nissan, with full voting rights, though it is the smaller partner. Ghosn was the glue that held the alliance together — now he is gone.

Agreeing to a deal in which Renault would have doubled in size, without resolving this issue, may have been too much for Nissan.

Big is rarely easy

A merger of this size, complexity and importance cannot be expected to be easy or quick.

In another, simpler industry, Bayer’s pursuit of Monsanto in 2016 took half a year; competition clearances another 21 months.

Yet the deal was still too hasty — Bayer’s share price has fallen 42% since Monsanto capitulated in September 2016. Litigation alleging that one of Monsanto’s main products, Roundup weedkiller, causes cancer has savaged the acquirer. This was not new news, but a known peril before Bayer made its bid. In its eagerness, it decided to live with the risk.

If Elkann really believes in the Renault deal, he needs to have a serious conversation with Hiroto Saikawa, CEO of Nissan, and Osamu Masuko at Mitsubishi. They need to establish whether FCA-Renault really is a combination that can be established within the Alliance.

If so, and their conditions can be met, the Japanese partners ought to be able to support it unequivocally.

If not, Renault — and France — will need to choose which relationship is more valuable.

The Fiat-Renault deal is not dead, nor critically wounded — it is in a serious, but stable condition.