Splitting Renault in two requires careful driving

A division of Renault in two would require very careful driving. The €7.3bn French carmaker could separate its electricity and fossil fuel units. This could increase its valuation and open the door to new capital. It would also increase costs and complexity for CEO Luca de Meo.
Like most carmakers, Renault is grappling with the switch to electric vehicles, which require huge amounts of investment. New entrants like Tesla are drifting further away, and Renault’s operating margin, at just 3% last year, trails rivals like Stellantis or Mercedes-Benz.

A sunken valuation and complex governance – shareholders include the French government and Japanese partner Nissan Motor, in which Renault itself holds a 43% stake – make it difficult to raise new capital. And a merger is unlikely after a failed attempt to unite with Fiat in 2019.

Separating electric and internal combustion vehicle units could help. The former could be better valued, rewarding shareholders and allowing it to raise capital. If Berenberg’s projected sales for 2023 are taken, and a valuation multiple of 3 times is applied -half that of Tesla-, the new Renault Electric could be worth almost 11,000 million euros. That’s more than the group’s current enterprise value, after taking into account debt and pension plan liabilities, of 3 billion euros.

The risk is that investors will apply a car accident discount to the moribund internal combustion business, which will suck up funding for years.

Like a reverse merger, a spin-off could also increase costs if activities were duplicated. Even if that overlap were only applied to 2% of operating costs, perhaps half that of a traditional automaker merger, it would eat up roughly half of Renault’s pre-tax profit this year, according to our estimates.

The political part could also be complex. Plans to keep Renault Electric’s headquarters in France would help keep the government and unions on their side. However, the addition of Nissan as a manufacturing partner could involve a renegotiation of the complex Franco-Japanese governance arrangement.

There may be ways to deal with these challenges. Renault could keep some units, such as purchasing and logistics, at the company level. holding company, which would allow both companies to share common resources. The merger of the combustion engine business with other companies would also lead to savings. However, any division will create more risk and complexity, and will consume management time. Perhaps De Meo’s hope is that the more enlightened Renault’s electric business becomes, the less the need for radical surgery elsewhere.

The authors are columnists for Reuters Breakingviews. The opinions are yours. The translation of Carlos Gomez Downit is the responsibility of Five days

A spin-off from Renault would require very careful driving. The €7.3bn French carmaker could separate its electricity and fossil fuel units. This could increase its valuation and open the door to new capital. It would also increase costs and complexity for CEO Luca de Meo.
Like most carmakers, Renault is grappling with the switch to electric vehicles, which require huge amounts of investment. New entrants like Tesla are drifting further away, and Renault’s operating margin, at just 3% last year, trails rivals like Stellantis or Mercedes-Benz.
A sunken valuation and complex governance – shareholders include the French government and Japanese partner Nissan Motor, in which Renault itself holds a 43% stake – make it difficult to raise new capital. And a merger is unlikely after a failed attempt to unite with Fiat in 2019.
Separating electric and internal combustion vehicle units could help. The former could be better valued, rewarding shareholders and allowing it to raise capital. If Berenberg’s projected sales for 2023 are taken, and a valuation multiple of 3 times is applied – half that of Tesla – the new Renault Electric could be worth almost 11,000 million euros. That’s more than the group’s current enterprise value, after taking into account debt and pension plan liabilities, of 3 billion euros.
The risk is that investors will apply a car accident discount to the moribund internal combustion business, which will suck up funding for years.
Like a reverse merger, a spin-off could also increase costs if activities were duplicated. Even if that overlap were only applied to 2% of operating costs, perhaps half that of a traditional automaker merger, it would eat up roughly half of Renault’s pre-tax profit this year, according to our estimates.
The political part could also be complex. Plans to keep Renault Electric’s headquarters in France would help keep the government and unions on their side. However, the addition of Nissan as a manufacturing partner could involve a renegotiation of the complex Franco-Japanese governance arrangement.
There may be ways to deal with these challenges. Renault could keep some units, such as purchasing and logistics, at the holding level, which would allow both companies to share common resources. The merger of the combustion engine business with other companies would also lead to savings. However, any division will create more risk and complexity, and will consume management time. Perhaps De Meo’s hope is that the more enlightened Renault’s electric business becomes, the less the need for radical surgery elsewhere.