Ghosn makes a $2bn bet on Mitsubishi

Back in the 1990s, Renault quietly explored the case for investing in Mitsubishi Motors. But instead, the French carmaker chose to inject $ 5.4bn into Nissan, which was then close to collapse.

Nearly two decades later, after the creation of an alliance between Renault and Nissan, the journey is coming full circle.

Carlos Ghosn, chief executive of the Franco-Japanese partnership, is making a ¥237bn ($ 2.2bn) bet that a fully-revived Nissan can rescue Mitsubishi Motors from a damaging scandal involving falsified fuel economy tests.

Nissan’s agreement to buy a 34 per cent stake in Mitsubishi, one of the world’s smaller mass market carmakers, is testimony to the stark choices in the industry as it grapples with challenges around technology and the environment. Smaller players must likely find niche strengths to stay independent, or join forces with a bigger rival to survive and prosper.

“There are significant and rapid changes occurring in the auto industry,” said Osamu Masuko, chief executive of Mitsubishi Motors, on Thursday. “It is difficult for us to address the environmental challenges and autonomous driving on our own and we needed a partner we could trust.”

Co-operation between carmakers worldwide has been increasing for years as companies take advantage of scale to lower their costs. Cross shareholdings, however, are unusual — Renault has a 43 per cent stake in Nissan, while the Japanese carmaker holds 15 per cent of the French group’s stock.

For Nissan and Mitsubishi, securing volume is critical to bringing down the cost of batteries installed in electric vehicles.

Nissan, known for its Leaf brand, is cumulatively the world’s biggest seller of electric vehicles. Meanwhile, Mitsubishi’s iMiev was the world’s first mass-produced all-electric car when it was released in 2009.

But with eight large car manufacturers, the Japanese automotive industry has been particularly slow to consolidate. This is partly because smaller players such as Mazda and Fuji Heavy were successful in building a solid fan base with distinctive products.

Bankers say, however, that Japanese companies are gradually becoming more open to accepting foreign capital and relinquishing their independence to stay afloat.

Sharp, for example, in March agreed to sell itself to Taiwan’s Hon Hai Precision Industry, better known as Foxconn. Mazda and Fuji Heavy have also formed tie-ups with Toyota.

“Company boards and their shareholders are making more sober and rational choices,” says Tosh Kojima, managing director at DC Advisory, a corporate finance adviser.

“There may be ways to resist the trend, but eventually acquisitions of smaller-sized carmakers will become inevitable.”

Nissan and Mitsubishi, which formed a mini-car joint venture in 2011, said they held talks to expand their partnership long before the fuel economy scandal occurred in April.

“It was objectively accelerated by this unfortunate event. But it has been hanging in the air,” said Mr Ghosn, when asked how the capital tie-up talks began.

Takaki Nakanishi, a former Merrill Lynch analyst who now runs his own research group, says Nissan may have moved quickly to acquire a 34 per cent stake in Mitsubishi amid fears that other carmakers and even technology companies may target its electric vehicle technology.

Osamu Masuko

Osamu Masuko © EPA

“If it had waited for everything to be uncovered [in the scandal], there was also a risk that prices could rise,” he adds.

Under the agreement between the two companies, Nissan will buy Mitsubishi stock at a price of ¥468.52 per share. This would represent a 46 per cent discount to its share price before the scandal broke on April 20.

Still, with regulatory investigations into Mitsubishi’s fuel economy measurements continuing, investors are sceptical whether proper due diligence can be done by Nissan.

Mr Masuko has said the company has enough cash — which stood at ¥462bn at the end of March — to address the scandal’s financial costs, which analysts say could reach ¥300bn.

But if the crisis expands, analysts warn Nissan could be forced to shoulder liability and compensation costs as well as provide financial assistance to Mitsubishi’s suppliers and dealers.

Mitsubishi has also had a mixed record in alliances involving minority stakes. Its partnership with the former DaimlerChrysler fell apart in 2004, and it was bailed out by other companies in the Mitsubishi group the same year after a vehicle-safety scandal.

In 2010, it abandoned plans to form a capital alliance with PSA Peugeot Citroën, although the two companies have a partnership in Russia.

Even after Nissan’s acquisition of a 34 per cent stake, Mitsubishi group companies, including Mitsubishi Heavy Industries, are expected to retain a 22 per cent stake in Mitsubishi Motors, which could pose a tricky balance of power between the big shareholders.

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