EUR 850.00 For Business Accounts Only

Morningstar | Nissan Proposes Removal of Chairman Ghosn and Director Kelly on Misconduct; JPY 1,480 FVE Maintained

No-moat-rated Nissan reported that for several months, it had conducted an internal investigation of misconduct by chairman Carlos Ghosn and director Greg Kelly after receiving a whistleblower tip. Media reports say the Japanese public prosecutor has arrested Ghosn on charges that he and Kelly underreported Ghosn's compensation to the Tokyo Stock Exchange by tens of millions dollars over many years. Nissan also said Ghosn's misconduct included personal use of corporate resources with Kelly's "deep involvement." Ghosn is also chairman and CEO of Renault and chairman of the alliance governance entity. Renault acknowledged the Nissan press release and said that a board meeting would "be convened very shortly."

For now, we have little information that would cause us to change our JPY 1,480 fair value estimate for the shares of Nissan or our EUR 88 fair value estimate on the shares of Renault. 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 would disband. Headline risk to valuation will be high in the near term, but for patient long-term investors, we view the shares of Nissan and Renault as attractively valued with 4-star ratings.

The news was a complete shock to us. Judging from the wording of the press release, Renault was taken by surprise as well. We had respected Ghosn as an adept industry operator and credit him with an impressive turnaround at Nissan in the early 2000s, as well as building the Renault-Nissan-Mitsubishi alliance. While we view the allegations against Ghosn as a serious breach of shareholder trust in the senior leadership of not only Nissan but also the entire alliance, we find media headlines saying that the alliance may fall to be overly alarmist.

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.