A sum of the parts..Renault

Renault (RNO.France)

Price: €26.35 (11/29/2011)

This is an unusual finding for me, a large cap trading at such a discount.  I'm not adverse to buying large caps, my portfolio has a few, but I tend to avoid writing about them because a lot of ink is already spilled following the largest companies.  In the case of Renault I haven't been able to find much about this except for a brief mention in this past weekend's Barrons.

Background

In the late 90s the automotive industry was experiencing a consolidation wave, instead of merging Renault decided to form a new type of alliance with Nissan.  Renualt bought 34% of Nissan's outstanding shares with the agreement that Nissan would purchase part of Renault when financially able.  Nissan had hit a financial rough patch and had a near bankruptcy experience in 2000.  Nissan recovered and purchased 15% of Renault in 2001.  Eventually Renault increased their stake in Nissan to 44%.

The idea behind the alliance is that both companies can operate independently and retain their branding yet share key strategic technologies.  The cross shareholding structure encourages both companies to act in the best interest of themselves and the partner company.  A partnership structure like this seems very strange to US investors, but it was actually very common in Japan in the 60s and 70s but less so today.  A company would purchase shares of suppliers and distributors creating an incentive to work together.  At times the crossholdings could also lead to a certain nepotism where a company would use their preferred supplier even if the supplier had a higher price and worse execution.

Outside of the Nissan stake Renault also owns stakes in Volvo AB which is a truck manufacturer, and a stake in AvtoVAZ which is a Russian car company.  Renault looks at both holdings as strategic alliances but not to the same level as the Nissan holding.

As a note when looking at Renault's statements they use the equity method under IFRS to consolidate their statements, if anyone is unfamiliar with this method here is a great link.

Sum of the parts breakdown


Renault has a holdings in three public companies, Nissan, Volvo AB, and AvtoVAZ, since all of the holdings are public it's easy to piece together the current value of what Renault owns.  I have it broken down the values and translated to Euro in the following spreadsheet:

What's pretty clear right away is that the total of Renault's public equity holdings is twice the current market cap and amounts to €49.78 a share.  If we assume that Renault's market cap is an accurate reflection of their current operations alone and add back their holdings the total is €74.38.

A discount to such a tangible asset value is rare especially for a large cap.  Just a simple analysis like this is really enticing, this is the elusive $1 for $.50, but with a caveat.  The problem is the liquid assets most likely aren't realizable (I discuss below), and in a down market the value of all the holdings will shrink because Volvo, Nissan and AvtoVAZ are all automakers.

I think the better way to look at this investment is an investment in Renault with a sizable margin of safety.  At this point I'm not comfortable enough with my own understanding of Renault's operations to make an investment.  I think this is more of an investment in Renault with downside protection than an asset play.

Why does this exist?

In a lot of my recent posts I've been asking the question "why is the stock cheap?" as a way to examine if the stock is deservedly cheap.  The reasons for the Renault cheapness I think are a bit more straightforward and probably even more warranted.

The first thing is that Renault has no intention of liquidating the Nissan stake to unlock value.  Renault looks at the Nissan holding as a strategic relationship, where selling off Nissan would almost be like spinning off a subsidiary company.  I think the market reaction would actually be negative regarding a share sale instead of something positive that unlocks value.  I think this is true especially considering the fact that both parties talk about how great the relationship is to their related businesses.

The second reason I think this disparity exists is that the market judges both Renault and Nissan on their own respective operations.  The joint holdings have existed for more than a decade meaning this isn't some sort of hidden asset.

I'm not sure if either reason is a good reason for Renault to be selling at such a discount, I'd actually be interested if someone out there knows how long this condition has persisted.

Talk to Nate about Renault

Disclosure: No position