Divorce? Merger? Renault-Nissan alliance faces a crossroads

Nissan has the right to increase its stake in Renault to more than 25 per cent in the event Renault intervenes with Nissan's governance.
Nissan has the right to increase its stake in Renault to more than 25 per cent in the event Renault intervenes with Nissan's governance.PHOTO: REUTERS

TOKYO (BLOOMBERG) - Renault SA and Nissan Motor Co's two-decade partnership is hurtling towards a reckoning, their carmaking alliance shaken by the arrest of former chairman Carlos Ghosn in November and fruitless merger talks with Fiat Chrysler Automobiles NV.

Forged in 1999 when Renault bought a stake in the struggling Japanese carmaker, the group - which now includes Mitsubishi Motors Corp - has always been marked by a lopsided relationship. While Nissan is the largest partner in terms of vehicle output, Renault exercises more control over the Japanese automaker.

Ghosn, who was charged with financial crimes and is facing trial next year, had long sought to merge the companies in order to take on Toyota Motor Corp and Volkswagen AG.

Renault was poised to strengthen its hand just a couple of weeks ago, when Fiat proposed a combination of the two European automakers. Instead, Nissan's reluctance to back further negotiations triggered the deal's collapse.

Now, Nissan chief executive officer Hiroto Saikawa is seeking to calm tensions after Renault Chairman Jean-Dominique Senard threatened in a letter to block critical board appointments at Nissan's shareholders' meeting on June 25. The letter could become a bargaining chip for Nissan to extract concessions from Renault, as well.

"They are back to the starting point," said Mr Koji Endo, an analyst at SBI Securities Co.

Going forward, here are the potential scenarios for the automakers:

NISSAN-RENAULT REBALANCING

Nissan may interpret Mr Senard's letter as interference in its governance, opening a path it can use to rebalance its relationship with its long-time partner. If Renault abstains from voting on Nissan's new governance structure, it could prevent the proposal from passing because the French automaker owns 43 per cent of Nissan and could make it difficult for Nissan to pass any measures.

 
 

Under the updated agreement governing the alliance, Nissan has the right to increase its stake in Renault to more than 25 per cent in the event Renault intervenes with Nissan's governance.

Then, according to Japanese corporate law, Renault's voting rights could be cancelled. The Japanese automaker currently holds 15 per cent of Renault with no voting rights.

Another step that could help ease tensions is for Renault to grant one of Nissan's main wishes by selling down its stake. Under French rules, if Renault lowered its stake in Nissan below 40 per cent, that would help the Japanese carmaker get voting rights in the French company.

While they may not be able to separate completely, the relationship could evolve toward a more equal footing, according to Mr Takeshi Miyao, an analyst at Carnorama in Tokyo.

"It will be difficult for them to split up," Mr Miyao said. "This puts Nissan in a better position and improves their hand. Nissan will have a bigger voice and the ability to push their views."

INCH TOWARDS A MERGER

The monumental task of adapting to an industry that is embracing electrification and self-driving vehicles also adds pressure on Nissan and Renault to merge. Although Nissan and Renault collaborate, they will have to spend billions of dollars to compete against Toyota and Volkswagen, which have become increasingly willing to embrace new technologies.

Together, the alliance employs more than 350,000 people worldwide. While the automakers aren't fully integrated, they share car platforms and factory assembly lines to produce more than 10 million vehicles per year.

Mr Senard first made an informal merger proposal to Nissan's CEO in April. There's a discussion document outlining potential terms, and Renault has signalled it's ready to step up discussions whenever Nissan is ready.

The proposal calls for a holding company structure, which would provide for equal ownership and board representation for Renault and Nissan. This new entity wouldn't be based in Japan or France, people with knowledge of the matter have said.

"Nissan makes up almost 100 per cent of Renault's corporate value, so obviously Renault won't let it go," said Mr Kota Mineshima, an analyst at Morgan Stanley MUFG. "Renault wants to have a full-fledged merger."

A GRAND PARTNERSHIP

Although unlikely, Fiat also could reopen merger talks by negotiating directly with Nissan in addition to Renault. By painting a picture of a grand alliance to take on larger rivals, Fiat may be able to entice the Japanese automaker with offers of more say in a Fiat-Renault-Nissan-Mitsubishi global auto group.

Early signs of direct talks emerged this week, with reports that a representative for Fiat met with Nissan's Mr Saikawa. The Japanese CEO said Monday he had communicated with a Fiat adviser, without elaborating on the substance.

 
 

French Finance Minister Bruno Le Maire, in Japan for G-20 meetings, said it was important for the alliance between Renault and Nissan to be "solid and sustainable" before any merger with Fiat. He cited rising competition in the global auto industry, especially from China.

A BREAK-UP

Before the Fiat saga, Nissan resisted closer capital ties with Renault, saying the priority was to put its own business on solid footing after reporting its lowest operating profit in a decade. With the deal scuttled, the question is whether Nissan can forgive Renault's short-lived affair.

"Overall, it is a mess and just makes a tricky situation worse," said Ms Janet Lewis, an analyst at Macquarie Capital Securities (Japan) Ltd. in Tokyo. "It had appeared that Senard was trying to make the alliance work. I no longer believe that."

If they part ways, it wouldn't be the first split between European and Japanese automakers. Suzuki Motor Corp's partnership with Volkswagen ended in acrimony in 2015, with Suzuki buying back 3.8 billion yen (S$47.7 million) of its own shares from Volkswagen. They initially planned to cooperate on small, fuel-efficient cars for emerging economies, but relations deteriorated in 2011 after the Japanese company agreed to buy diesel engines from Fiat.

Nissan may not really want to be part of a European or global automaker, and it may be inevitable that Renault eventually exits Nissan, said Mr Max Warburton, an analyst at Sanford C. Bernstein & Co.

"Renault needs to let the Japanese go," Mr Warburton wrote in a June 6 report. "It should sell its Nissan stake (to the Japanese government or Japanese banks). Then, with billions in the bank and a higher share price, call Elkann again."

He's referring to Fiat Chairman John Elkann, who pulled the Renault merger proposal when the French government intervened, citing Nissan's reluctance.