EUR 850.00 For Business Accounts Only

Morningstar | Fiat Chrysler Proposes Merger with Renault; Maintaining FVEs: FCA at EUR 28 and RNO at EUR 90

No-moat-rated Fiat Chrysler has submitted a nonbinding letter to Renault, also no-moat rated, proposing a 50/50 merger of equals where the shareholders of each company would receive an equivalent stake in the merged entity. To even-up the differences in market equity value, Fiat Chrysler shareholders would receive a EUR 1.60 special dividend per share (EUR 2.5 billion) plus spin-off shares of Comau, the industrial robotics company owned by Fiat Chrysler. If Comau is not spun-off, Fiat Chrysler shareholders would receive an additional EUR 0.16 dividend per share (EUR 250 million).

We view the combination of these two companies as reasonable given global competition, high capital intensity, and industry disruption from electrified powertrain as well as autonomous technologies. While we would prefer to see more flexibility with respect to capacity optimization, we recognize the political and unionized obstacles to headcount reduction in the U.S., Italy, and France. Even so, Fiat Chrysler estimates greater than EUR 5.0 billion in annualized cost savings from the convergence of vehicle architectures and powertrains. The combination of several models on similar architectures with the powertrain produces greater economies-of-scale in purchasing, R&D, and manufacturing efficiency.

For now, our fair value estimates on the 5-star-rated shares of each, Fiat Chrysler and Renault, remain unchanged at EUR 28 and EUR 90, respectively. Assuming a one-for-one share exchange for common stockholders of each company, we value the combined entity equity at EUR 66.4 billion versus the current market capitalization of EUR 34.7 billion. We think that for investors, who do not already own either one of the stocks, would benefit more from owning Fiat Chrysler which currently trades at a 56% discount versus Renault's 38% discount to our fair values.

In our view, the two companies each benefit from each other's strengths. Fiat Chrysler, a laggard in powertrain electrification, would benefit from Renault's leading position in electric vehicles. Each company has substantial low-profit, small-car volume in Europe and South America, where economies-of-scale would significantly improve profitability. Renault would gain the highly profitable Jeep and Ram brands. Fiat Chrysler would have access to Eastern Europe with Dacia and Lada brands. The combination of the two organizations would result in the fourth-largest automaker in North America, the second-largest in Europe, and the number one market share in South America.

However, including Nissan and Mitsubishi, Renault's Alliance partners, the group would be number one in the U.S. at 3.8 million vehicles sold last year. In contrast, GM, Toyota, and Ford sold 2.95 million, 2.43 million, and 2.42 million, respectively. In Europe, Volkswagen would retain its leading position in passenger vehicles at 3.7 million units, compared with combined FCA/Renault plus alliance partners at second with 3.2 million vehicles. Including light commercial truck and van, FCA/Renault with alliance partners would lead the market at 4.7 million units versus Volkswagen group's 4.2 million vehicles. Globally, the combined FCA/Renault with alliance partners would be by far the largest automaker at more than 14 million vehicles versus Volkswagen and Toyota, each at more than 10 million vehicles.