INSIGHTS

Stefano Sciacca

Fri, Jun 7


KYLIN TALK | Stock Watch 07.06.19

Story of a diplomatic collapse: the absurd FCA-Renault merger failure

 

 

When there are too many parties sitting around the table, naturally consensus unanimity can more likely become unreachable. This is what could have led to potentially the third-largest automaker on the planet Renault.

First things first, the FCA publicly announced their offer for a €33bn merger to Renault on last 27th of May. The deal implied the two carmakers owning each 50% of the new business entities, creating combined deliveries of 8.7m per year, larger than that of Toyota and GM and only just behind VW and Toyota. The new conglomerate would have also represented circa €170bn in revenue and an operating profit greater than €10bn.

The factors that complicated the deal were the ownership composition of the two companies. The FCA still has the founding Agnelli family as the main shareholder (29%), while the French government owns 15% of Renault. As part of the Renault-Nissan-Mitsubishi alliance, stipulated in 1999, Renault currently holds 43.4% of Nissan’s voting rights, while the Japanese car manufactures owns 15% non-voting rights of its French counterparty.

 

 

All-in-all, many parties on the private and public side have been involved. Stock markets have welcomed the deal that saw both companies’ shares rally on the announcement day (please see “chart of the week” below).

On Thursday Fiat surprisingly pulled its offer off the table, with only a small chance of reengagement in the deal (Renault share price plunged 7%). Both parties have naturally blamed each other for the breakdown in progress. Nissan had been reported as playing a supportive role in the talks, despite the Japanese company abstained from voting. On the other hand, the French officials claimed there was not enough time to close the deal and win over the Japanese allies, asking for more time to further discuss the deal. Renault said in a statement:  “We are gratified by the constructive approach of Nissan and wish to thank FCA for their efforts”, while France’s attempts to change conditions regarding their final stake in the new company (would have been halved to 7.5%), made the Italian car manufacturer walk away from the deal.

According to the Italian most-acknowledged economic newspaper “ilsole24ore”, the main reasons for the non-execution of the deal are (1) request for a French general headquarter (2) presence of French officials in the new company’s board (3) guarantees for French manufacturing plants and employees.

What happens next is uncertain, but there might still be room for an agreement forming the third-biggest automaker in the world. On the 25th of June Senard, Renault CEO, will fly to Japan for the annual Nissan’s shareholder assembly and this matter will likely be put on the table. Nissan had raised issues on cost-savings, technology sharing and other matters, while some investors complained about the apparently “undervalued” valuation of Renault backed in the deal and that the €2.5bn paid in dividends should have gone to the French company rather than to FCA Group shareholders. One thing is for certain, If the two companies continue to operate separately, they will be more exposed to the shifting dynamics of a sector that has been facing lots of headwinds currently. The car industry has already been consolidating in the past 10-15 years, while the recent softening demand, especially from China, along with tariffs on components may well further push big “names” towards their direction.  



Hot Topics:

 

  • Macro and Monetary policy update:

This week has been particularly intense with the two main Central Banks (Federal Reserve and European Central Bank) holding their economic outlook and monetary policy updates.

In the United States, the Federal Reserve’s Chairman Jerome Powell sent a very strong signal that the Central Bank is ready to cut interest rates should the economy weakened further due to trade war developments. The governor said: “we will act as appropriate to sustain the expansion” and the markets have welcomed Powell’s general “dovishness” (conservativeness) with the S&P 500 gaining 2% in one single day (up 12% YTD), while US Treasuries yield (at 2.12%) offset the sharp decline experienced in the previous days amid growing investors’ concerns about economic growth and inflation (normally when consensus on the economic outlook deteriorates, investors shift their focus into “safer” assets such as government bonds, pushing prices up and yields down), especially after the latest disappointing jobs report.

In the Eurozone, the ECB governor Mario Draghi announced the extension of the “zero interest rate” policy until at least the first half of 2020 albeit lower-than-expected inflation. Draghi mentioned that inflation will be consistently monitored although there is no risk of either deflation or recession.

Outlook-wise, the ECB upgraded its Euro-area growth and inflation estimate by 0.1% for 2019, while it decreased 2020/2021 estimates by 0.2% and 0.1%, respectively, compared to March growth forecast update. Excessive “protectionism”, geopolitical uncertainties, Brexit negotiations and general economic conditions have been frequently mentioned during the speech, although the governor highlighted the current economic situation is “way” better if compared to the one leading to the “whatever it takes” extraordinary procedure. The ECB governor ended the speech by mentioning that in the last 5 years 10 million jobs have been created (unprecedented in such a short period of time) and Eurozone unemployment is at historically low levels.




 

  • Global trade tensions update:

Although Washington – Beijing trade war seems to escalate, Boeing is in talks to negotiate one of the largest-order-ever agreed with Chinese airlines. The deal would involve 100 twin-aisle jets 787 Dreamliners and 777X, where the most expansive jet would cost around $442mn each. The US-based plane maker edged up more than 1.2% following the leak. The Chinese side is waiting for the ready-to-go from the government, while the deal might cool down the tension on the American side. This follows the United States ban on Huawei products and Trump’s threat to implement a new tariff of 5% on all Mexican goods imported unless the Mexican government would start collaborating regarding the immigration “issue”. According to Bloomberg, talks at the White House between Trump’s representatives and the Mexican officials have not ended with a mutual consensus on the matter, while the Peso has plummeted against the dollar and the Central American country credit rating has been downgraded from “Stable” to “Negative” and from “BBB+” to “BBB” by Moody’s and Fitch, respectively.

Christine Lagarde, International Monetary Fund Chief, warned the institute forecasts 0.5% tariff impact on global economic growth as US jobs boom starts softening. The IMF called the trade war “self-inflicted wounds” that would hit an economy that is still recovering. The US-China tension will cost as much as $455bn, an amount larger than the size of South African economy. The US economy, as previously mentioned, shows signs of a slowdown as the likelihood of a Fed’s benchmark rate in 2019 increased from 53% to 63% on Wednesday.

 

Next week our macro spotlight will be on?

Monday:

 

  • GDP monthly estimate, UK: April 2019
  • Construction output in Great Britain: April 2019 and new orders January to March 2019
  • UK trade: April 2019

 

Tuesday:

 

  • Labour market economic commentary: June 2019
  • Public sector employment, UK: March 2019
  • UK labour market statistics: June 2019

 

Thursday:

 

  • Industrial production April 2019 – Eurozone
  • Interest rates (3 months) May 2019 – Eurozone
  • Long term government bond yield May 2019 – Eurozone
  • UK trade in goods by classification of product by activity: Quarter 1 2019

 

 

Chart of the week


 

Fact of the week

Wealth management firm St James’s Place announced it had terminated its mandate with Neil Woodford, the UK’s most renowned portfolio manager, to lead three of its funds for total assets of £3.5bn. The picker said on Wednesday morning he was “extremely sorry” for halting investors from withdrawing cash from his flagship £3.7bn Equity Income Fund. The investment vehicle has suffered an increasing stream of outflows for 2 years (£560mn-worth redemptions only in the past 4 weeks) with the fund’s asset under management to drop from May 2017 peak of £10.2bn to £3.7bn.

 

Quote of the week

“It’s as important to walk away from the table as it is to sit down”

Sergio Marchionne, former CEO of FCA Group and for many analysts one of the most successful CEOs ever within the Industrial sector. He unfortunately, passed away July 2018 having re-shaped a struggling Italian manufacturing company on the edge of cutting nearly 13,000 jobs in 2003 into the country’s biggest firm which employs more than 200,000 people worldwide.


556 views

USER IMAGE