The politics of ‘merger’ plan between Fiat and Renault

Fiat has a generous view of what defines a merger of equals. Its proposed combination with French rival Renault contains a premium. The top-up is a sign that any aspiring partner for Renault needs to show that it disagrees with the market’s dim view of the company’s worth.

The Italian suitor was capitalised at €17.8bn last week — before its ambitions emerged, while its putative partner was worth €14.8bn. Crunch the pair together at no premium and Renault shareholders would own less than half of the group, and of the value created from a merger.

That wouldn’t fly in Paris. Any deal between these national icons must be seen to divide the spoils equally. What’s more, a transaction can’t look like an Italian takeover. The politics are too sensitive.

Hence Fiat has found a way to give Renault shareholders a 50% stake in the enlarged company despite the pair’s different starting points. It proposes paying a jumbo dividend to its own shareholders so that it shrinks.

But the terms don’t quite deliver this egalitarian outcome: Fiat is still contributing more of the value. Fiat envisages paying its owners €2.7bn. Back that out of Fiat’s share price last week, add a dividend that Renault is about to pay, and the suitor’s merger offer contains a 10% premium over where Renault closed last week. A purist’s merger of equals would see Fiat siphon off more cash for its shareholders beforehand — about €4bn would do it.

Why is Fiat being so chivalrous?

The answer is not that Renault has recently traded at an abnormally cheap comparative valuation. Speculation of a pairing with France’s Peugeot has arguably helped its stock. Even so, both Fiat and Renault are Europe’s cheapest volume carmakers based on forward earnings.

There are more plausible explanations for compensating Renault. One is that Fiat needs to respect the idea that its desired partner could indeed be too cheap. Renault’s 43% stake in Japan’s Nissan was worth €11bn — the majority of the French group’s undisturbed value.

Deduct Renault’s net cash, and its core carmaking business effectively comes for free. How can Renault management endorse a deal at that price?

Another is that Fiat doesn’t want to take any more cash out of the business via that jumbo payout. More awkwardly, might it be that Fiat would be first among equals in terms of senior management and needs to compensate for that? That won’t automatically guarantee the French group feels like it’s got the better side of the deal.

Bloomberg