The Renault split: a "false good idea"?

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Following the example of Ford or Volvo, Renault says that it is studying a project to split up its assets, distinguishing between combustion on the one hand and electric on the other. If the project, which is still very unfinished, were to take shape, then it could resolve some difficult immediate financial questions, but it would nevertheless present some important dangers. The first would concern the durability of the Alliance and the second the ability of a "new Renault" thus conformed to make use of the indispensable synergies between new and old knowledge and know-how.

Sign of the times, Renault's current situation is no longer industrial, technological or strategic. In April 2022, it consists of an examination of the opportunity that a split between the moribund combustion engine assets and the future assets associated with electric vehicles would represent, from the financial point of view and from the point of view of the phantasmatic "balance of the Alliance".

Faced with a situation where the world stock markets and the analysts who shape their behaviour 'value' Renault at less than 7 billion euros, 7 billion, it would be urgent to restore the group's stock market image by endorsing the very unfair judgement of the markets on the value of Renault's historic businesses - which concern thermal vehicles but also hybrids and rechargeable hybrids - in order to create an electric entity which would be relieved of the weight of the past and which the cherished investors would see as a sort of Tesla, a little more 'old fashioned', which they would value more fairly. Volvo and Ford had initiated this fashion. Renault, caught up in the Russian-Ukrainian turmoil, threatened by the resurgence - real or supposed - of a return of the Nissan disputes in the Alliance and still engaged, with its allies Nissan and Mitsubishi, in the fight for electric leadership, is tempted by this way. 

The underlying questions that remain too often implicit and that deserve to be examined are these:
- Is Renault's undervaluation problematic?
- Is Renault's need for recapitalisation obvious and what would a demerger bring in this perspective?
- Is the Alliance in danger and/or would the synergies survive the split?
- Does the split make sense operationally and, if not, could the vital synergies survive the split?

If we want to be a little quick, today the markets consider that Renault is worth nothing since, although it is a 43% shareholder in Nissan, valued at 16 billion euros, the share is quoted at 22 euros which corresponds to a capitalisation of less than 7 billion.  

Apart from the fact that this confirms Nissan's claim that it is unfair or problematic that the most important part of the Alliance is not the one that has the power, this situation means that if Renault wanted to finance without going into debt important investments made necessary by the electric transition, then an increase in its capital to which the State would subscribe would imply that we accept that its shares grow considerably and its voting rights as well. If other means of financing the expansion could be found (convertible bonds, etc.), then, since any takeover is impossible, Renault could continue to consider the share price as fairly indifferent to the life of the company.

For these reasons, the fundamental question is whether Renault should be recapitalised. 
Indeed, the implementation of a long-term technological, industrial and internationalisation strategy and the weakening of Renault's position that the probable obligation to withdraw from Russia implies, combine to make Renault face important cash needs: In order to be equipped with the means indispensable both to pay off its liabilities and to reinvest massively in the technological and industrial assets which would allow it to hope to face up to the initiatives of the major competitors who, like VW, have committed colossal means to manage their transition to the battery electric vehicle (BEV), Renault needs a few billion which its current profitability will not be sufficient to provide in the desired timeframe. 

The plan mentioned these days would seem to be to create two entities, one for the traditional activities associated with combustion vehicles and the other for the electric ranges. The first could be centred on Spain and Romania and the second on France.  
Both would remain backed by the reference shareholder, the State, and would invite Nissan to take part in the round table. To achieve this, the current Renault group could possibly sell a significant proportion of the Nissan shares held, which would be a way of mobilising the cash that the company needs. By isolating the assets associated with the electrical part of the business, which is promised vigorous and profitable growth and where Renault believes it can still claim a significant lead over its competitors, the hope is to break with the chronic undervaluation of the Renault share. According to L. de Meo: "This reorganisation will allow us to show that in terms of electric vehicles we are among the best. The current structure of the company does not make the value of the business that exists inside visible from the outside. Renault has less than 7 billion in capitalisation, I think that's not the value we deserve."

Concerning the rest of the business, that is to say the part that would be thermal and not electric and would be perceived as industrial more than technological - that Automotive News calls the "legacy business" -, it is obviously still in the majority. As far as it is concerned, the new scheme of the 'jigsaw' Renault is less clear. According to Le Monde, L. de Meo wants to make the nuggets of the group visible, and in particular Dacia. He puts forward his arguments:
"We have never revealed the results of Dacia. You can perhaps guess the reason: we were ashamed to show them alongside those of Renault. Dacia has double-digit margins. Its business model is difficult to copy. You have the know-how of low cost engineers, you have factories in very competitive countries (Romania, Morocco) and you are capable of producing quality, you have profitable sales, 85% to private individuals, without pushing volumes. I tried in my past life to create an anti-Dacia. I didn't succeed."

Automotive News says, it could then team up with a partner that could be Geely knowing that Renault struck a joint production deal with Geely earlier this year for a plant in South Korea, and that the two companies have said they could also cooperate in China.

Of course, even if L. De Meo and T. Piéton, financial director, affirm that nothing will be done without Nissan and that they are driven by the double desire to financially involve Nissan in the two entities on the one hand and to have as a priority that "the industrial and operational content of the Alliance remains", the question of the future of the synergies that have been sought for 23 years is raised.

Le Figaro states: "In terms of governance, the French group has in any case made a cross on the control of the Japanese group" and as proof of this, the Renault boss declared to Les Echos: "Even if we have 43% of Nissan's capital, we are not the owner of the company, it is not like Volkswagen with Audi". Leaving the very "political" question of the Alliance to J.-D. Senard, L. De Meo seems, from the outset, to have had great difficulty in integrating this asset into the strategic equation which he believes to be that of Renault. 

However, Renault is not present either in China or in North America and all its challengers - except Stellantis, which is practically absent from China - and a significant part of what Renault will be able to offer as a vehicle and as batteries tomorrow could be associated with Nissan assets. Incidentally - as we shall see at the presentation of Nissan's results in May - part of the money that Renault will miss because of the deprivation of its Russian activity could be brought to it by the Nissan dividends that it has missed in recent years and which remind us that if the Yalta between the two allies concerning China remains problematic, it is partially compensated for by this means.

It would be infinitely more difficult to create two separate work contracts and ultimately two organisationally watertight entities. This will have to be monitored.
 

The weekly column by Bernard Jullien is also on www.autoactu.com.

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