Renault May Wait on Volvo Sale, Eliminate $6.8 Billion in Debt

Renault SA may keep its Volvo AB stake until a rebounding heavy-truck market boosts the price 25 percent, allowing the carmaker to raise about 50 billion kronor ($6.8 billion) and wipe out most of its debt.

France’s second-biggest automaker will probably wait for Volvo’s improving outlook to push the stock to 112.5 kronor before unloading its 21.8 percent holding, the average estimate of 10 analysts surveyed by Bloomberg shows. The stock has gained 48 percent this year, closing up 1.1 percent at 91.15 kronor.

Chief Executive Officer Carlos Ghosn pledged last month to reduce the carmaker’s net debt of 5.9 billion euros ($7.8 billion) through non-strategic asset sales. Banks are preparing to bid for the stock sale and expect invitations soon, according to people at two financial institutions, who asked not to be identified because the discussions are confidential.

“Renault’s under no real pressure to refinance right now, so Ghosn can wait for the U.S. recovery to be better reflected in Volvo’s share price,” said Max Warburton, an analyst at Sanford C. Bernstein in London who correctly predicted Renault’s share-swap deal with Daimler AG three weeks before it was announced on April 7.

With credit conditions improving and a 3 billion-euro French government loan repayable next year at the earliest, Renault “may wait until then and do a clean swap,” he said.

Volvo, along with European rivals Daimler AG, MAN AG and Scania AB, this month reported first-quarter earnings that beat analysts’ estimates as demand for heavy trucks improved. Volvo on April 23 posted net income of 1.68 billion kronor, its first profit in more than a year. Analysts had forecast a loss of 8 million kronor. The shares gained 10 percent.

‘Encouraged’ by Gains

Chief Financial Officer Thierry Moulonguet said April 27 that Renault, based in the Paris suburb of Boulogne-Billancourt, was “encouraged” by Volvo’s share-price gains. The carmaker has the flexibility to dispose of the stake “when we judge most appropriate,” he added. Renault and Volvo spokesmen declined to comment for this story.

As Ghosn waits, Volvo’s outlook is improving. The company will post second-quarter net income of 2 billion kronor on sales of 64.5 billion kronor, according to the average estimate of eight analysts. First-quarter trucks orders more than doubled in Europe and rose 19 percent in North America, Volvo said.

Volvo forecasts growth of 10 percent for Europe’s truck market in 2010 and up to 30 percent in North America, after deliveries slumped in both regions last year. The Swedish company is also benefiting from reduced labor costs after shedding 12 percent of its workforce in 2009.

Trading Higher

“Volvo will trade higher as soon as there’s conclusive proof of orders recovering in the U.S.,” said Mike Tyndall, London-based automotive specialist with Nomura Securities. “There’s still more to come from developed markets as they recover, and as payback for all the work they did last year.”

Renault may sell the stock to more than one institutional or industrial investor, analysts said. Among potential buyers are current Volvo owners Industrivarden AB and Christer Gardell’s Violet Partners LP, they said. Both companies declined to comment.

Number Crunching

“They’re probably sitting now and crunching the numbers” said Michael Andersson, an analyst with Evli Bank in Stockholm who has a “reduce” rating on Volvo. “It’s really open.”

Reaching 112.5 kronor, the average share price seen by analysts as the likely trigger, would take Volvo to a high last seen on Dec. 14, 2007 -- the year truckmakers posted record profit and sales on surging demand.

Today’s gain in Volvo stock was the second-biggest on the eight-member Bloomberg Europe Autos Index.

Credit-default swaps on Renault debt fell 9 basis points to 215 points, according to prices from CMA DataVision at 3:55 p.m. in London, indicating improving perceptions of credit quality.

About one-third of Renault’s stake is made up of so-called A-shares, which have 10 times the voting rights of the more widely held B-shares and currently are trading slightly lower. Renault acquired its Volvo stake in 2001, when Volvo swapped its shares for the French company’s Renault and Mack truck units.

Whatever Renault decides, “Ghosn has already proven he’s a better broker than all those investors who were pushing him to sell at 60 kronor last year,” said Gaetan Toulemonde, a Paris- based analyst at Deutsche Bank AG.

Renault shareholders renewed Ghosn’s mandate as a director for another four years at their annual meeting in Paris today. The CEO told investors that the company will return to profit at the net income by 2011 “at the least.” Ghosn told reporters that he’ll outline a new medium-term strategy later this year to replace targets in the so-called Commitment 2009 business plan that were abandoned during the global recession.

To contact the reporters responsible for this story: Laurence Frost in Paris at lfrost4@bloomberg.net; Ola Kinnander in Stockholm at okinnander@bloomberg.net.

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