Honda and Nissan Consider Potential Merger

According to a report by Nikkei, Honda (NYSE:HMC) and Nissan (OTC:NSANY) Motor (TYO:7201) are exploring negotiations for a potential merger that may also involve Mitsubishi Motors Corp. (TYO:7211), where Nissan holds a 24% stake.

A merger would create a company valued at $54 billion, with an annual production of 7.4 million vehicles, positioning it as the third-largest automotive group globally in terms of sales volume, after Toyota (NYSE:TM) and Volkswagen (ETR:VOWG_p).

On Wednesday, shares of Nissan and Mitsubishi Motor increased by 23% and 19%, while Honda fell by 3%.

Already, the two companies had initiated a strategic collaboration in March to develop electric vehicles (EVs). However, Nissan is facing financial and strategic challenges, necessitating closer ties with Honda.

For Renault (EPA:RENA), a significant Nissan shareholder, such a merger would have "mostly positive implications", providing strategic options and benefits. Jefferies analysts noted an over 5% jump in French automaker shares during European trading.

Potential benefits include a higher Nissan share price and improved liquidity, particularly through the sale of Nissan's 18.7% stake, valued at €1.33 billion. However, tax considerations may delay this process.

Renault could end up with a smaller minority stake in the merged entity, enjoying synergies and better returns, especially as Honda ceases production in Europe, enhancing collaboration opportunities.

Analysts pointed out the possibility of a share swap that could function as a 15% buyback for Renault without cash outlay.

However, there are cautions that Renault might experience downsides from holding a small, illiquid stake in the merged entity, limiting its influence.

Under a nil-premium merger scenario, Jefferies estimates that Honda shareholders would control about 84% of the combined equity, while Renault's 35.8% stake in Nissan, valued at €2.78 billion, would be diluted down to 5.8%, split between its core holding and shares for sale.

In conclusion, analysts led by Philippe Houchois stated, "The combination of Honda, Nissan, and MMC would create a top 3 OEM with 8 million units and a global footprint, continuing the consolidation of Japanese OEMs into two main groups, enhancing scale and accelerating technological advancements in EVs, AVs, and software."