Exor: the best way to play the FCA Renault merger?

FCA has unveiled a proposal for an all-share merger with Groupe Renault. The ‘transformative’ deal, which would see both FCA and Renault owning 50% of the merged entity and would create the world’s third largest auto-manufacturer. The proposed arrangement would make Exor the de-facto reference shareholder of the new group, giving the Agnelli family a strategic foothold in the auto industry.

Following the proposal made by FCA (c.€19bn market cap car manufacturer) to Renault (c.€16bn market cap car manufacturer), initial operational discussions between both companies are moving ahead, while Renault’s board examines the details of the potential transaction.

Bringing together both auto-manufacturers would create the third largest global automotive group, with estimated annual production of 8.7 million vehicles. The merged group would benefit from a broad portfolio including premium brands, SUVs, pickup trucks and light commercial vehicles, as well as a more balanced geographical presence.

This combination is expected to generate €5bn of economies of scale per year. No plant closures are envisaged following the merger, with most of the economies coming from shared R&D costs, shared vehicle platforms and increased purchasing power.

The two companies would merge under a new Dutch-based holding company structure, with Exor becoming the largest shareholder, followed by the French state (which would—at least-initially lose its double voting rights) and/or Nissan depending on the mechanics of the transaction.

To bring the market values of the two companies roughly into line, FCA shareholders will receive a €2.5bn dividend, netting Exor c.€730m in dividend payments if the deal goes through

Our Analysis

With global auto sales facing a downturn and a rapid shift to EVs, global auto-manufacturers are seeking ways to preserve profitability and maintain their market positioning. In this context, FCA’s call for industry consolidation, through its proposed merger with Renault, is a logical move for the company as it faces the challenges of declining revenues and recent trends such as car-sharing, EVs and the emergence of autonomous driving.

Given the huge investment demanded by the electric and autonomous car, economies of scale are seen as the only option. The estimated €5bn cost savings would come principally from the convergence of platforms, the consolidation of electrical powertrain and electrification investment and the benefits of scale. FCA specified that cumulative implementation costs should amount to €3-4bn and that the synergies would be net cash flow neutral in year one and positive from year two onward.

Renault would also help FCA with the technologies needed to avoid the 9-digit CO2 fines from Brussels (after it paid Tesla €1.8bn for access to its carbon rights) and be in a better position to enter into transforming technologies, including electrification and autonomous driving.

Exor, FCA’s parent company, is in our opinion a must-have if the proposed merger between FCA and Renault materializes. The new entity, with a c.€30bn market cap, would result in 38.9% upside in the NAV for Exor, bearing in mind that its current 29% stake on FCA would be diluted to just below 17% based on our calculations.

For Exor, this move would signify a departure from what we had thought was a portfolio slowly retreating from the cyclical auto industry while maintaining its exposure on the more resilient reinsurance sector. Nonetheless, the family still maintains a solid foothold in automakers through its FCA stake and its 24% stake in Ferrari.

If the merger unfolds as planned, which insofar seems to have positive acknowledgment from the French and Italian governments, the outcome would be a complete change of the governance of the new group. At first glance, the combination looks quite positive from the point of view of the shareholders. No wonder then that both FCA and Renault saw their share prices climb following the announcement (+8% and +12%, respectively).

The perfect scenario would bring FCA and Renault together with Exor selling FCA to Renault against new Renault shares. Exor would hold a smaller stake in a bigger entity while Renault will find a new reference shareholder in Exor. But more importantly, the merger would create a new entity with a strong balance sheet, which should improve the dividend upstream flow from FCA on a standalone basis.

All things considered, as discussions between the two companies carry on and more details emerge, we believe there’s a good case to jump into the potential deal via Exor

Our take

The merger of FCA and Renault is not only an attractive investment proposition for both manufacturers but also for Exor which should benefit from a solid foothold, as the largest shareholder in a new global car giant and the prospect of “merger 2” with Nissan when the Japanese player wakes up to the opportunity/from its zombie governance . However, the completion of the merger (if it ever happens) could take several years. As a reminder Exor is also a play on the consolidation of the reinsurance industry (merger of Partner Re and Scor?) so that minority can kill two birds with that proverbial Exor stone.

Exor's NAV

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