After Years of Courtship, Renault and Nissan May Merge

Media reports circulating on March 29 have purported that no-moat-rated Renault and Nissan (NSANY) are in talks to merge. The two automakers have been alliance partners, with Renault first owning a stake in Nissan, since 1999. Today, Renault owns roughly 43% of Nissan while Nissan holds about a 15% stake in Renault.

The two companies had announced earlier this month that the alliance management team was negotiating closer integration to extract additional cost savings from economies of scale.

One impediment to the deal may be Nissan’s reluctance for the combined entity being partially owned by the French government. France currently owns approximately 20% of Renault common equity. While we believe that a merger would better enable the objective, integration would be relatively rapid given the vast amount of already shared purchasing, engineering, and vehicle platforms between the alliance partners.

Currently trading at 2 stars with a 25% premium to our EUR 79 fair value estimate, we view Renault shares as overvalued. However, we think investors should consider Nissan shares. The 4-star-rated ADRs currently trade at 21% discount to our $26 fair value, while the Tokyo-exchange-traded shares are at a 25% discount to our JPY 1,450 fair value estimate.

We think Nissan shares are attractively valued relative to our estimates for revenue growth, profitability, and return on invested capital.

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