Wednesday , May 5 2021

As Ghosn departs, the Renault-Nissan relationship in the spotlight



Is it all over?

That's certainly the impression given by the French and Japanese governments following the arrest and ousting of Nissan chairman Carlos Ghosn.

Hours after the Japanese company's board voted to remove him due to allegations of misconduct, the two countries' finance and economy ministers met and pledged support for the alliance between Nissan and Renault, where Mr Ghosn is still nominally chairman and chief executive.

Perhaps this particular body can be swept under the carpet and both sides can agree to go about business as usual. But the tensions that the past week has laid bare are not going to vanish so easily – if anything, they've been exacerbated. Despite the warm words from politicians, it's worth war-gaming what Renault and Nissan could do if they wanted to push this situation towards a breaking point. Monday's events show that what's unthinkable is no longer quite the same as what's impossible.

Could Nissan push for control of Renault?

The conventional view is that there is no way this could be done. France in 2014 introduced a suite of laws designed to make foreign takeovers of key companies more difficult – one reason that the French state's 15 percent stake in Renault and its consequent influence within Nissan has become such an irritant in recent years.

At the same time, these rules are not watertight. The one that has received the most attention has been granting double-voting rights to European shareholders who have held their stakes for more than two years. Combined with the fact that Nissan's 15 percent stake in Renault is not a controlled company, it gives Japanese business a major handicap in any fight for control.

Still, Renault's rating has fallen to a desperately low level and Nissan has access to some seriously cheap capital in the form of its net cash holdings and Japanese corporate debt markets. As a result, the Asian company could make a hostile bid over the head of the French government at a valuation so generous that institutional shareholders – many of whom will have the same double-voting rights as Elysee Palace – would be loath to turn it down.

According to Bloomberg's merger calculator, Nissan could offer € 100 (Dh416) per share in cash – and 70 percent premium to current levels and the best price Renault shares have seen since 2007 – and still increase its earnings per share by more than 70 per cent within the first year. Assuming that just 16 per cent of shares are held by European institutions that have held the stock for more than two years, the French government's blocking vote would remain stuck below 25 per cent.

There is a separate law that requires foreign bidders to seek prior government approval for takeovers in strategic sectors but it is hard to argue that car manufacturing has a place on that list and any attempt to include it would probably violate European Union laws.

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Read more:

Quicktake: Fate of Nissan-Renault alliance hangs in balance after Ghosn arrest

Nissan board dismisses Carlos Ghosn as chairman

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It's unlikely that an attack of this kind would succeed in dislodging the French government stake in Renault – but it would remain as a nuisance at best, with Nissan having an unprecedented control over the entire group.

Could Renault push for control of Nissan?

This is the other arm of the Mexican standoff. Renault already has 43.4 percent of Nissan shares, so it would not need to buy many more to move to 50 percent and control of the company.

Nothing as dramatic as a full takeover would be necessary – which is helpful since Nissan is costlier and Renault's operating cash flows are weaker. Japanese law treats a two-thirds majority as the more important takeover threshold and Renault would be allowed to buy shares on-market to top itself up to 50 per cent without even launching a formal offer.

Nissan's articles of incorporation will not be able to control key material issues such as mergers, de-mergers and amendments. But it would have been the demand for non-independent directors of its choice, and so get control over company policy.

Will this happen?

With the placatory sounds emerging from French and Japanese politicians, it seems like the danger of all-out war has passed for the moment.

Either of these strategies would be full of hazards – financial, operational and even diplomatic. There's a reason that France and Japan are both seen as a difficult territory for hostile takeovers, and any bid mounted while Mr Ghosn is still locked in a Tokyo prison cell would certainly be hostile.

Moreover, France is further tightening its laws protecting against foreign takeovers, which is likely to make such actions even harder in the future.

Still, it would be foolish to ignore how fragile the truce between the two sides now is, or how potent are the weapons that remain in their armouries. This alliance has been held together with bonds of trust and those withered away in the past week. Even a Maginot Line can be breached.

Bloomberg


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