GM-Nissan-Renault: An S&P Scorecard
Tracinda Corp., a 9.9% shareholder of General Motors (GM) recently sent GM's board of directors a letter proposing that the existing Renault S.A. and Nissan Motor Co. Ltd. (NSANY) partnership for engineering, manufacturing, and marketing be expanded to include GM. Renault and Nissan could purchase a large minority stake in GM, and Renault and Nissan's boards of directors have given approval to discuss this concept with GM. GM's board of directors is reported to be reviewing the proposal.
What are the immediate rating implications of this proposal? Here's a company-by-company look:
Rating: B/CreditWatch Negative
We do not see any near-term rating implications from the possible alliance, and some cost benefits could come from a partnership. But we would be wary of the challenges of implementing such an alliance. GM and Renault compete fiercely in Europe, Renault does not compete with GM in the U.S., and Nissan is an important competitor in North America.
The ability of all three parties to structure, agree on, and execute manufacturing, purchasing, and other benefits given the obvious complexity is suspect, and the track record of certain past attempts is mixed at best. GM's problems are extensive in North America and include substantial postretirement health-care obligations that an alliance would not address. Nissan's U.S. plants are located in the South and are not unionized, in contrast to GM's plants.
We also have concerns about how the implementation of such a dramatic shift in strategy would affect GM's existing plans to return its North American operations to profitability, as well as its operations and results in Europe and the rest of the world. Any cash from a sale of GM stock to Renault and Nissan would likely be only incremental to GM's already adequate liquidity and is not a significant rating factor currently.
We do not see any near-term rating implications for Renault (BBB+/Stable/A-2) from the possible alliance, as long as industrial integration remains limited so that Renault's and Nissan's production capacities are not disrupted by issues related to GM. But an extensive alliance could affect those arrangements, so the depth and breadth of any such alliance will be a crucial factor we will review. The acquisition of a minority stake in GM would increase Renault's industrial debt, but it was relatively low at year-end 2005, and the group would maintain adequate financial measures. The group's non-core 20% stake in Volvo AB provides financial flexibility, anyway.
Renault would also likely be protected from GM's huge liabilities, and its exposure would be limited to its equity investment. The alliance with GM could bring material economies of scale to the three companies, increasing notably its bargaining power vis-à-vis suppliers. The track record of the alliance with Nissan is an element of comfort, but both groups were relatively the same size and were not focused on the same markets. Conversely, scale difference with GM and intense competition in North America and Europe could create difficulties. Also, the implementation of the alliance would be extremely time-consuming for the managements of the different groups, and this is a concern at a time when market conditions are very tough and Renault has launched an ambitious growth program.
We do not see any near-term rating implications for Nissan from the possible alliance—but as noted above, the breadth and depth of an alliance with GM could become a complex management challenge and represents a strategic shift for Nissan and Renault and must be viewed cautiously in the context of Nissan's existing rating (BBB+/Stable/A-2).
At this point, we view the possible acquisition of a minority stake in GM as having only a limited negative effect on Nissan's financial standing, assuming it makes a minor investment in GM. At the end of the fiscal year ended in March, Nissan had 19.6 billion yen in total debt and 414.6 billion yen in cash and cash equivalents, resulting in a net cash (negative net debt) position of 394.9 billion yen. The company also reported earnings before interest, taxes, depreciation, and amortization (EBITDA) of 1,202.9 billion yen for the fiscal year, although Nissan's sales slowed in major markets due to the lack of new model launches, and the company should continue to face challenges in the near-term.
The possible alliance with GM may bring material economies of scale, particularly in North America, which is Nissan's largest market; the company generates roughly 60% of its consolidated profit from the U.S. Potential benefits may include increased bargaining power with suppliers and efficiency in procurements. However, it is still too early to assess potential synergies from the alliance options. Nissan's track record and experience in the sharp recovery of its performance should be important assets in the alliance, but scale differences with GM, different relationships with unions, and existing and possible competitions with some of GM's models in North America could become obstacles.
Standard & Poor's Ratings Services expects this proposal to evolve, and as more details or decisions occur, we will update our views on the rating effect for the companies involved.