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France's Renault Offers to Buy 35% Controlling Stake in Japan's Nissan

Autos: Deal comes after talks with DaimlerChrysler fell apart. Analysts say management control, cost cutting will be key issues.


TOKYO — Renault of France offered Tuesday to buy a controlling 35% share of troubled Nissan Motor Co., a deal that would give Europe its first beachhead to Japan's auto-manufacturing industry.

Although details are still being negotiated, the linkup would in theory enable Nissan, No. 7 worldwide in vehicle production, and No. 11 Renault to compete more effectively against bigger players in the rapidly consolidating global auto industry.

Debt-ridden Nissan would get a much-needed infusion of capital and Renault would gain access to Nissan's engineering prowess. Both companies would benefit from cost cutting, expanded reach in each other's market strongholds and manufacturing integration possibly leading to the joint production of vehicles.

Still, the unusual union--sushi and chardonnay, in the words of one analyst--raises the question: Can two nags become a thoroughbred? Most analysts said no, although a partnership should allow them to stay in the race.

"I don't think you'll end up with a barnburner or a new Honda," said Steven Usher, analyst with Jardine Fleming Securities (Asia) Ltd. "But it could reduce costs and add value."

Renault's board approved a proposal to take a 35% stake in Nissan--enough, under Japanese law, to wield veto power over the company's decisions--in return for a cash injection that analysts estimate at about $4 billion. The companies did not disclose the basic terms agreed to thus far, adding that they will now begin exclusive negotiations.

"We will work out conditions for forming an alliance in the days ahead so that a conclusion can be reached by the end of this month," Yoshikazu Hanawa, president and chief executive of Nissan, said in a statement.

Hanawa and Louis Schweitzer, Renault's chairman, met in Paris during the weekend after DaimlerChrysler of Germany broke off talks with Nissan.

The Renault offer is good news for Nissan, which is staggering under a huge debt load. The deal should help the company shore up its battered balance sheet, raise its credibility in global markets and stave off a ratings downgrade that threatened to put its commercial paper in the junk bond category.

But the logic is less clear for Renault.

"Of course, for Nissan it would be great. . . . They get money for nothing," said Christopher Richter, analyst with HSBC Japan. "From Renault's standpoint, I'm quite underwhelmed."

Century-old Renault is motivated by cost reduction, a broader geographical reach and even, some analysts suggest, a desire to bolster French pride by ensuring that a national brand lives on in the global auto market.

"In order to survive, Renault needs a partner," said Shinji Kitayama, analyst with New Japan Securities Co. "And Nissan was chosen."

If the two are going to do more than survive, however, they must work out delicate management-control issues, defuse any hidden Nissan debt bombs and stay focused on cost cutting, analysts said. Yet if it all works out, Nissan could see a turnaround in as little as 18 months, some estimate. If not, it could take a decade or more.

Renault's proposed capital infusion would ease Nissan's debt burden, which is estimated at $22 billion to $37 billion, depending on whether one includes its less-risky consumer finance obligations.

At present, Nissan's debt-to-equity ratio--a measure of debt relative to outstanding stock--is about 266%. If Nissan pays down some of its obligations in advance, as promised, and applies the full Renault injection against its debt, the 266% ratio could fall as low as 48%, excluding the consumer finance debt, said Jardine Fleming's Usher.

"That puts them well in the ballpark," he said. "I don't think there's an analyst around who would complain about that."

Equally important, the money would let Nissan's management focus more on the market and new models, rather than be distracted by its weak finances.

Nissan shares rose 16 cents to close at $4 on Tuesday in Tokyo, before the deal was announced. Renault shares lost $2.12 to close at $36.81 in Paris.

A number of potential risks loom, however. The two companies complement each other's geographical strengths--Renault in Europe, Nissan in Asia and the U.S., where it is the sixth-biggest car retailer. But both rely heavily on similar mid-market models. "They would be competing against each other," Richter said.

Furthermore, Renault's 40% shareholder, the French government, could veto sizable job cuts in European factories. And Renault has a mixed track record with foreign partnerships.

"Renault doesn't have a long history of managing overseas companies," said Peter Boardman, analyst with Warburg Dillon Read (Japan) Ltd. Renault's purchase of American Motors Corp., which it later sold to Chrysler at a big loss, ended in disappointment. Its only other major acquisition, Mack Trucks, has done better.

Ultimately, will a Renault-Nissan combination be greater than the sum of its parts?

"This won't turn them into a testosterone-filled NFL linebacker," said Usher. "But they sufficiently complement each other to ensure mutual survival."

Etsuko Kawase in The Times' Tokyo bureau contributed to this report.

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