In a move that will create the world’s third-largest carmaker (after Volkswagen and Toyota), Italian-American carmaker Fiat Chrysler [FCA] and France’s Renault [RNO] announced a merger proposal on Monday. Renault’s ownership would be split 50-50 between its own and Fiat Chrysler shareholders. Both Renault and Fiat Chrysler's share prices have jumped on the news, up 14% and 6% respectively since Friday's close.
Renault's share price climb since last Friday's market close
The announcement follows what has been a difficult time internally for both companies. Last year, Fiat Chrysler’s CEO Sergio Marchionne died following a short illness, with successor Mike Manley hastily appointed as CEO just a week before Marchionne’s death. Meanwhile, Renault’s former CEO is still reeling from charges of financial misconduct, which the Japanese authorities arrested him for in November.
The French and Italian governments appeared to back the proposed deal, with both country’s leaders excited by the prospect of a new “industrial giant” in the region. Italy has stipulated that Fiat is not to close any plants.
On Monday, both Renault and Fiat recorded their largest ever intraday share price increases, at 16.7% and 19.5% respectively.Renault 1-year share price performance, CMC Markets, 30 May 2019
The merger is mutually beneficial for both companies: Renault has made significant headway in electric vehicle development, while Fiat Chrysler has a strong foothold in the US market. Combined, the company could make annual savings of €5bn by combining research, purchasing and other costs, and produce 8.7 million vehicles per year.
The merger does put a halt to a potential deal between Nissan and Renault, which was being pursued prior to prior to Renault CEO Carlos Ghosn’s arrest. The carmaker has said it will not agree a transaction with Nissan in the short term.
|P/E ratio (TTM)||4.69||5.87|
|Quarterly revenue growth (YoY)||-6.10%||-4.90%|
Renault & Fiat Chrysler share price vitals, Yahoo finance, 30 May 2019
A key message from the Fiat-Chrysler-Renault announcement is that carmakers need to join forces in order to realise a future with fully autonomous, electric vehicles. Other recent consolidations in the automotive industry include a joint venture between Daimler and Geely in China and an alliance between Volkswagen and Ford.
While a joint announcement has been made, the deal is not yet set in stone. Renault board members are reportedly aiming to make a decision early next week on whether or not to go ahead with the merger.
With this uncertainty in mind, and with the automotive industry as a whole battling against some difficult headwinds, some analysts are suggesting that now is the time to exit any Renault investments.
“In view of the high investment costs for future technologies such as autonomous driving and electromobility, a merger or close cooperation between FCA and Renault makes perfect sense. As a result of the merger euphoria, Renault shares rose by around 13% to 56.63 euros this morning,” Frank Schwope, an analyst at German investment bank Nord-LB said on Monday. “We recommend that you use this price increase to exit the Renault share and sell it.”