EUR 850.00 For Business Accounts Only

Morningstar | Ghosn Resigns as Renault CEO and Chairman; FVEs Unchanged--Renault EUR 88, Nissan JPY 1,480

No-moat-rated Renault reported that Carlos Ghosn, the embattled chairman and CEO, has resigned. The board named industry veterans Jean-Dominique Senard as chairman and Thierry Bolloré as CEO. We think key-man risk is substantial, as Ghosn was widely credited with maintaining relations and coordinating strategies between the Alliance partners--Renault, Nissan, and Mitsubishi. Even so, in our opinion, given the Alliance's long-term existence (founded 1999), collaborative efforts have become entrenched in its culture. We think the coordination of greater efficiencies can be shared among a broader base of executive leadership as opposed to being concentrated in one individual.

However, management distraction from leadership turmoil will likely continue for the foreseeable future. Prior to his arrest in Japan for understating income at and transferring stock losses to Nissan, Ghosn was considering a merger between Renault and Nissan, among other alternatives to increase Alliance permanency. Even though Nissan is more financially healthy and produces the majority of Alliance volume, Renault controls the group through its 43% ownership in Nissan, while Nissan holds a 15% stake in Renault. With the French government controlling 15% of Renault, Nissan was increasingly concerned that Alliance power would be consolidated in France rather than shared across the organization.

For now, we have little information that would cause us to change our fair value estimates, Nissan at JPY 1,480 and Renault at EUR 88. If the removal of Ghosn and his management team results in substantial changes in alliance group ownership, our fair value estimates for Renault and Nissan may need to be adjusted. However, we think there is less than a 25% probability that the alliance will disband. In the near term, headline risk to valuation will be high, but for patient long-term investors, we view the shares of Nissan and Renault as attractively valued at 4-star ratings for each.

The scandal represents substantial key-man risk to the alliance but, in our opinion, the risk does not rise to the level of existential. The alliance generates substantial economies of scale for the participants, resulting in research and development and capital spending leverage that would not be achievable if each company were on its own.

In our opinion, Nissan, currently the financially healthiest of the partners, may take advantage of the scandal as an opportunity to increase its ownership of Renault. Renault controls the group through its 43% ownership in Nissan while Nissan holds a 15% stake in Renault. Nissan CEO Hiroto Saikawa said to the press that the concentration of power in one individual for a prolonged period contributed to the misconduct. We interpret Saikawa's comments as a prelude to a leadership transition for the alliance.