Sunday, July 09, 2006

Skepticism over GM megadeal mounts

Thursday, July 06, 2006
Skepticism over GM megadeal mounts
Analysts raise questions about viability of global alliance with Renault-Nissan
Bill Vlasic and Christine Tierney / The Detroit News

While a high-level team at General Motors Corp. races to study a potential GM-Renault-Nissan alliance, questions are being raised about the viability of the proposed three-way partnership.

GM's board will meet Friday to consider a plan by billionaire investor Kirk Kerkorian to link GM with Renault SA of France and Japan's Nissan Motor Co. -- whose boards already have approved entering formal talks with GM.

GM's preparations are also geared toward a pivotal meeting, first reported by The Detroit News, July 14 between GM Chairman Rick Wagoner and Carlos Ghosn, CEO of Renault and Nissan.

As GM Chief Financial Officer Fritz Henderson and the automaker's investment banks rush to critique the idea before GM's board meeting, the wisdom of a trilateral deal is being questioned in the United States, France and Japan.

Several Wall Street analysts have already raised doubts about tying GM to Renault-Nissan.

"We do not think a Renault-Nissan-GM combination has fundamental long-term merit, but this does not mean it will not happen," said Ronald Tadross of Bank of America.

In France, a top official of the government -- which represents the state's 15 percent stake in Renault -- was quoted by news agencies as urging caution before tying Renault-Nissan to struggling GM, which lost $10.6 billion in 2005.

"This has to be approached with enormous caution," said French Industry Minister Francois Loos. "The United States is an immense market, a complicated market, and General Motors is in a difficult situation because of problems that have nothing to do with cars."

Japanese auto analysts were also questioning whether Ghosn could solve GM's problems.

The Brazilian-born French executive has an excellent record turning ailing companies around, transforming Nissan from a near-bankrupt automaker to one of the industry's most profitable manufacturers in less than three years.

But, said Noriyuki Matsushima, of Nikko Citigroup in Tokyo, "there is no guarantee that just because Nissan succeeded, an attempt to turn GM around would succeed."

GM execs among doubters

Skepticism over the merits of a mega-alliance between GM, Renault and Nissan is also pervasive in the executive offices at GM, according to company insiders. The company recently paid $2 billion to extricate itself from a souring partnership with Fiat Auto of Italy. And it sold small stakes in Japanese automakers after the partnerships failed to help GM in Japan.

The courtship of Renault-Nissan was initiated by Kerkorian, who owns 9.9 percent of GM, and Jerry York, Kerkorian's top adviser and a GM board member.

Kerkorian shocked the auto world on June 30 by taking his plan public in filings with the U.S. Securities and Exchange Commission.

Since then, GM executives have been scrambling to analyze whether the automaker could benefit from joining Renault-Nissan.

Henderson, who took over as GM's CFO in January, is heading a study group that includes finance specialists from the automaker's treasurer's office in New York.

Renault-Nissan may form bloc

In addition, GM's outside investment banks are also helping to compile data on Renault-Nissan in advance of Friday's board meeting.

"It's not unusual that we would ask our bank advisers to help gather facts and provide analysis when you're looking at such a complicated transaction," said GM official Toni Simonetti.

GM's directors will meet by conference call Friday to discuss Kerkorian's proposal that a board committee be formed "immediately" to study a deal with Renault-Nissan.

People close to the discussions say Renault and Nissan would be prepared to jointly invest $3 billion in GM, with each company taking a 10 percent stake. That would establish a 30 percent shareholding bloc in GM, by far the largest in the U.S. automaker.

Ghosn touts advantages

Kerkorian's main objective appears to be to bring in Ghosn to speed up a restructuring of GM. People close to Kerkorian say he is dissatisfied with the pace of GM's recovery even though Wagoner has concluded landmark cost-cutting accords with the United Auto Workers union and deals to sell assets, such as GM's finance arm GMAC. Wagoner has laid out plans to downsize U.S. operations and is on track to cut 30,000 jobs two years ahead of schedule.

According to the French newspaper Le Figaro, Ghosn presented a strong case for a three-way partnership at Renault's board meeting Monday, describing the potential clout of the group and cost-saving opportunities.

In a prior meeting with Kerkorian and York, Ghosn said Nissan might be able to use some of GM's idle light-truck production capacity in North America as it expands its truck lineup.

GM executives might argue bringing in new investors and managers could have the opposite effect of distracting management from the recovery plan and a raft of upcoming model launches.

Together, the three companies' vehicle sales account for a quarter of the global market. Analysts see big potential gains in combining their purchasing programs as well as safety and environment technology development.

"The fact that Renault and Nissan CEO Mr. Ghosn would ever entertain the idea of a link-up with GM indicates that a sound business case can be made," said Merrill Lynch analyst Stephen Reitman.

"Arguably no other automotive CEO has as finely tuned antennae as to the trends and opportunities in the industry."

Rivals monitor progress

Other carmakers, including Toyota Motor Corp., are watching the developments closely because such an alliance would transform the industry landscape.

Reitman reiterated a buy recommendation for Renault shares in a report but forecast a bumpy ride as investors weigh the pluses of such an alliance against the potential minuses. DaimlerChrysler CEO Dieter Zetsche said Wednesday it takes years to see the benefits of cross-border deals.

"Every M&A guy will give you billions of synergies if you even think about any kind of alliance," Zetsche told reporters in Tokyo. "In the real world, it's somewhat tougher."

Analysts point out that GM is saddled with enormous problems that are very different from what Ghosn found at Nissan.

"The cost-saving opportunities at Nissan were far greater," said Rob Hinchliffe, analyst at UBS Investment Research said in a report. In 1999, Nissan had many assets that could be put up for sale. Secondly, Renault was in charge of the Japanese automaker after buying a controlling stake and Ghosn could put his cost-cutting plan into effect.

He sees fewer benefits, particularly in the near term, of a three-way alliance. "GM's purchasing cost are likely already competitive."

Renault and Nissan seem likely to benefit from GM's large presence in Latin America, Russia and in China, where it is one of the leading foreign automakers.

In a report illustrating how difficult it is to generate tangible benefits from an alliance, Merrill Lynch's Asia analyst Grace Pak says the potential savings in China will be limited by the fact that Renault-Nissan and GM have different Chinese venture partners, with different suppliers.

You can reach Bill Vlasic at (313) 222-2152 or

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