28 May 2019 by jbchevrel
Despite Mercedes’ triumph in Monte Carlo this weekend, I will not discuss it here, as firstly it has no implication for the CDS and secondly the title wouldn’t have been ‘#3’. Reversely, Fiat Chrysler Automobiles N.V. (ticker: FCAIM) was the best performing single-name CDS in iTraxx Xover today, with 5y CDS tighter by c28bp (since Fri close), while both the index and its fair value went wider by c2bp. FCAIM delivered a non-binding letter to the Board of Renault (ticker: RENAUL) proposing a combination of their respective businesses as a 50/50 merger of equals (equity split, with FCAIM shareholders to get €2.5b to compensate for the difference in market caps). From a credit point of view, no new debt seems needed to finance the deal and the base case is that existing bonds would stay in their boxes, if the deal goes through. There has not been any report of cross-default either, thus far. The RENAUL board reportedly responded that it would study the proposal ‘with interest’ and other reports then acknowledged that RENAUL would answer by the end of next week. From a strategy standpoint, brand portfolios appear complementary (covering a rather wide quality spectrum, from Lada/Dacia to Maserati/Alfa-Romeo). The two groups look geographically complementary as well (indeed RENAUL enjoys a strong footprint in Europe & CEEMEA whereas FCAIM is stronger in Americas for example) Net net, the deal would create a big big player, as proforma combined entity would be #3 globally (in particular, it would be #2 in EMEA, #1 in LATAM). From an economic standpoint. The synergy potential seems big on the paper (€5b per annum from year 6 thanks to platform convergence, consolidation of powertrain and electrification investments + economies of scale). Synergy-wise, no plant closure/layoff has been floated yet. It is not clear what rating the proforma would have, given that this is a IG-HY merger. The statement mentions “strong combined b/s allowing for flexible capital allocation and robust dividend policy”, which could suggest that the aim for the combined entity would be IG. Still to be seen, as the sector has challenges ahead of it, and agencies know it. As usual, the comments I post on this site do not have vocation to take a stance, but here are some potential factors which might play out to reverse the price action we saw today. The EC still has to be okay, from an antitrust standpoint, especially with regard to FCAIM- RENAUL big size (would be #3 player globally). As far as shareholders, with RENAUL and FCAIM respective stocks both up +13% and +7% since Friday close, we are unlikely to see strong opposition from them. That said, Nissan stock is just up 2%. Despite the fact that the FCAIM statement was strongly in favour of closer ties with Nissan (ticker: NSANY / €1b synergies), NSANY’s position within the RENAUL- NSANY alliance would automatically shrink. As far as states are concerned, the French and Italian governments seem supportive. I often commented autos’ potential M&As in this blog, and as a follow-up on May 9th note, it now seems that the higher the odds of FCAIM- RENAUL, the higher the odds of Peugeot-Jaguar LR.