DBRS Comments on Fiat Chrysler Automobiles N.V. Proposed Merger with Renault S.A.

DBRS Limited (DBRS) notes that Fiat Chrysler Automobiles N.V. (FCA; rated BBB (low) with a Stable trend by DBRS) has submitted a proposal to the board of directors of Renault S.A. (Renault; rated BBB with a Stable trend by DBRS) outlining a combination of the companies’ respective businesses in the form of a 50/50 merger (the Merger). Additional details of the prospective Merger include a resulting board of directors that would consist of 11 members (the majority of whom would be independent), with each of FCA and Renault having four appointees and Nissan Motor Co. Ltd. (Nissan; rated “A” with a Stable trend by DBRS) having one nominee. Renault’s board of directors has indicated that it would study the proposed Merger, which remains to be negotiated by both companies and would also be subject to customary closing conditions, including approval by each company’s shareholders and meeting antitrust and other regulatory requirements.

DBRS notes that the Merger, if completed, would likely have positive credit implications. The Merger would form the third-largest automotive original equipment manufacturer globally. Moreover, taking into account the existing alliance between Renault and Nissan (the Alliance), the expanded collaboration would readily represent the world’s largest automotive manufacturing entity. The Merger would also result in substantial synergies that, including assumed implementation costs, are estimated by FCA to be net cash flow neutral in year one and positive from year two onward. Ultimately, by year six, FCA projects that the Merger would produce run rate synergies (significantly arising from scale, platform consolidation and the concentration of alternative powertrain investments) of more than EUR 5 billion annually, with synergy sources that include, among others, purchasing efficiencies, research and development optimization as well as manufacturing and tooling savings.

DBRS also notes that aside from scale and associated efficiencies, the Merger has other strategic merits. These include meaningful gains for the combined FCA/Renault in both geographic and product diversification. In recent years, FCA has generated more than 80% of its earnings in North America, where Renault has no direct presence (although Renault is indirectly exposed to North America through Nissan, the latter’s performance in that market has weakened markedly). While FCA and Renault each have a significant presence in Europe, geographic diversification benefits would nonetheless result across Europe’s constituent markets, with the combined entity having a strong number two position in Europe. Both companies have favourable market positions in Latin America, with the Merger resulting in a leading regional position for the combined entity. Neither FCA nor Renault currently has a strong position in China, the world’s largest single automotive market.

In terms of product diversification, FCA is strong in both sport utility vehicles and pickup trucks, two vehicle segments that typically generate high contribution margins where Renault has a limited presence. Conversely, Renault is among the global leaders in electric vehicles, where FCA is thus far a relative laggard and is reportedly seeking to pool its fleet in Europe with that of Tesla Inc. to help attain compliance with tightening CO2 emissions regulation in the region. Finally, DBRS notes that the Merger would result in a brand portfolio that would only be rivalled by Volkswagen AG (rated BBB (high) with a Positive trend by DBRS), with the combined FCA/Renault containing well-established mainstream brands (e.g., Renault, Fiat), premium/luxury brands (e.g., Maserati) and finally entry-level brands (e.g., Dacia, Lada) that can also generate sound margins as a function of limited competition and associated firmer pricing.

In line with the above, DBRS observes that the Merger would result in a business risk assessment (BRA) of the combined entity that would be meaningfully stronger compared with the respective current stand-alone BRAs of both companies. DBRS further notes that the current financial risk assessment (FRA) of FCA and Renault both exceed levels commensurate with their existing ratings, with the industrial operations of both companies currently having a net cash position (i.e., cash levels in excess of total debt). Accordingly, the resulting financial profile of the combined entity is not expected to represent an impediment to a potential rating upgrade. As such, absent any unforeseen materially negative impact to the FRA stemming from the Merger, DBRS anticipates that the Merger would likely result in a higher rating for the combined FCA/Renault than the respective existing ratings of each both companies. For additional clarification, DBRS notes that in the case of investment-grade corporates, BRAs are typically materially overweighted relative to FRAs in the determination of a final rating.

Should FCA and Renault reach an agreement in principle toward an eventual combination, the ratings of both companies would be placed Under Review pending the closing of the Merger. Finally, DBRS notes that the potential ratings impact of the Merger on the ratings of Nissan are currently uncertain, with the Merger and its resulting estimated effects on the Alliance also possibly triggering an event-driven review of Nissan’s ratings.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2018), which can be found on dbrs.com under Methodologies & Criteria.

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