Financial Analysis of the Proposed Merger between Fiat Chrysler – Renault
In the press release published by Fiat Chrysler on May 27, it was announced that negotiations were held with Renault and a merger proposal was made. The announcement briefly shared details of the offer, Fiat Chrysler and Renault will each have 50% shares in a new company to be established in the Netherlands (due to lower corporate tax rates). As a result of this merger, Fiat Chrysler - Renault will become the third largest OEM in the world with 8.7 million annual vehicle sales.At the same time, the production and distribution network spread across a wide geography would enable the company to strengthen its effectiveness in different markets.
While Fiat Chrysler excels in the American market with the Jeep and Ram brands; Renault stands out in the European market with its electric vehicles. The combination of these two companies, achieved a turnover of 170 billion Euros with the 2018 figures and provided approximately 380 thousand jobs. On the other hand, Renault's cooperation with Nissan (The Alliance) brought the necessity of Nissan to be a part of the process for the agreement to be realized effectively. The arrest of Renault-NissanMitsubishi Alliance CEO Ghosn in previous months for allegations of corruption caused tensions between the two partners. This process, which was meticulously carried out by Fiat Chrysler Chairman John Elkann and Renault CEO Jean Dominique Senard, has been suspended for now due to Nissan’s negative approach and the French government's attitude to make the deal impossible. As Besfin, we examined the financials of these two behemoths in the automotive industry, the details and possible causes of
the merger offer and the effects of a merger between these two giants on the automotive sector in Turkey.
Details and Reasoning for This Offer
The proposal made by Fiat Chrysler emphasized that in addition to the Renault-Mitsubishi-Nissan Alliance, a synergy of 5 billion Euros will be created in addition to the synergies derived from the Renault-MitsubishiNissan Alliance. However, analysts find this figure to be high since the expected returns on past M&A activities in the industry were not delivered. Fiat Chrysler states that 40% of these synergies will come from purchases, 30% will come from R&D costs and 20% will come from increased production efficiency. Additionally, it is expected that these synergies will
have no effect on cash flow in the first year following the merger but will have positive effects on the cash flow from the second year and onwards. Fiat Chrysler states that as a result of the merger, it will strengthen its hand in electric vehicles and autonomous vehicles. It also emphasizes that the merger will allow them to use their capital more flexibly. However, Fiat stated in the press statement that no factory will be closed. We will see how accurate this announcement is if the merger takes place.
Fiat Chrysler was planning to distribute a one-time dividend of 2.5 billion Euros to its shareholders in order to achieve a merger of equals. The table above shows the market value of these two companies before the bid. At the same time, the increase in share prices after the press release shows that the proposal was received positively by investors. Despite the withdrawal of the offer, we can say that some of this gain has been preserved as of June 7.
We think that the road map followed by former Fiat Chrysler CEO Sergio Marchionne has an important effect on Fiat Chrysler's proposal for a merger of this size. Marchionne and Elkann believe that mergers should be made in order to achieve a reasonable profit margin in the automotive sector which has high capital density. Otherwise, they predict that the return on investments will decrease gradually in a highly competitive environment. In addition to these, there is a serious increase in research and development costs due to the transformation in the sector. Many partnerships are being developed in the sector for sharing this cost. The agreement between Subaru and Toyota for producing an electric model in the past days is just one of them. Mergers are one of the most convenient methods to divide this cost. As a matter of fact, Fiat Chrysler has been on a pursuit for M&A for a long time. We can say that Fiat Chrysler may consider other potential M&A options since the merger has not been realized as of now
Financial Comparison between Fiat & Renault-Nissan
To understand the scale of the merger proposal announced by Fiat, it would be useful to examine the financials of these three companies. When we look at global vehicle sales as of 2018, Fiat Chrysler-Renault-Nissan sold a total of 15.2 million vehicles. Considering that the biggest player Volkswagen Group sells 10.8 million vehicles, we can say that Fiat and Renault will gain a significant competitive advantage as a result of the merger.
When we examine the vehicle sales of Fiat Chrysler and Renault since 2016, we can say that Renault has performed successfully. However, it seems that increasing vehicle sales in 2018 did not positively affect company turnovers. On the other hand, sales of Fiat Chrysler increased slightly.
When the abovementioned sales amounts are analyzed together, it corresponds to 260.1 billion Euro turnover in 2018. The low performance of Nissan and Renault in 2018 compared to the previous year also shows that the two companies had trouble generating income. Moreover, the expectation of a slowdown in growth in the World Economic Outlook report published by the IMF in April indicates that vehicle manufacturers are waiting for hard times.
On the other hand, when we examine the net profit margins of Fiat Chrysler and Renault, we can say that Renault performed successfully. Although there is a decrease in the profit margin from 2017 to 2018, we can say that it creates more profitability compared to Fiat Chrysler.
In addition to the decrease in profit margins, a significant decrease is observed in the operating profits of Nissan, Renault and Fiat Chrysler compared to 2017. Increased competition in the sector and the inability of various players to create a profitable business model for electric vehicles play an important role in the decline in profitability. The economic recession, which is expected to occur especially in Europe in 2019, indicates that the companies will remain under pressure this year. This is one of the most important financial indicators behind Fiat Chrysler's merger offer.
Effects of This Merger to Turkey
As it is known, the Fiat Chrysler and Renault both have factories located in Turkey. Both these factories provide a significant amount of employment in Bursa. They have also contributed greatly to the development of the automotive spare parts industry in Turkey. While Renault has a factory with a capacity of 350 thousand cars; Fiat Chrysler has a factory with a production capacity of 450 thousand cars. The strict attitudes of the French and Italian governments regarding employment show that it will not be possible to dismiss workers in these two countries. On the other hand, in order to achieve the abovementioned synergies, a reduction in operation costs is required. Details about the way to achieve these operational cost reductions were not included in the offer. It is very difficult to predict whether there will be an increase or decrease in production capacity.
With the withdrawal of the offer made by Fiat Chrysler, we can say that the merger will not happen in the short term. However, considering the status of the automotive industry in the upcoming years, it is very likely to encounter a merger. In this context, we examined the financial information of Fiat Chrysler, Renault and Nissan and we examined the reasons, content and possible results of the merger proposal. In the table below, you can see the financial information of the three companies in detail.