When facing trouble, you can either close your eyes and hope it will go away or confront it head-on. Nissan appears to be following the latter strategy in dealing with Mitsubishi Motors’ falsified fuel-economy tests.
Japan’s second-biggest carmaker is looking to take a 33% stake in Mitsubishi, people familiar with the matter told Bloomberg News. The deal will take place via an issue of new shares to Nissan, Nikkei reported earlier.
The move is a bold way of inoculating Nissan against the fallout from 25 years of false testing data at Mitsubishi. Sales of Nissan cars fell 22% in Japan last month, steeper than the 15% slump suffered by Mitsubishi (which manufacturers minicars for its bigger partner). Based on Mitsubishi’s most recent statements, more mis-tested vehicles were sold under the Nissan brand than its own marque.
The approach in many ways resembles the 1999 deal that enabled Renault under current Executive chairman Carlos Ghosn to buy control of Nissan. Like Nissan in the late 1990s, Mitsubishi has pockets of strength but has experienced a dramatic plunge in value.
While Mitsubishi’s operating cash flows have tended to run at about a third to a quarter of those at Nissan, its market capitalization has been a fifth the size in recent years. That’s dropped further in the wake of the testing scandal, with Mitsubishi worth about 11% of Nissan as of Wednesday’s close (the shares were set to jump by the daily limit Thursday on new of the Nissan talks.)
Nissan’s main asset in this deal is its ¥1.4 trillion ($13 billion) cash pile, which would be sufficient to buy Mitsubishi’s shares almost three times over at current prices. Cash isn’t a great asset to hold at current Japanese interest rates, and a partial or complete takeover would help plug a few of the remaining gaps in Renault-Nissan’s global empire. Mitsubishi is particularly strong in Southeast Asia: In Thailand, a combined Nissan-Mitsubishi would stand a good chance of overtaking Honda and Isuzu for second place, behind Toyota.
There’s another, more challenging resemblance to the original Renault-Nissan deal. It’s only worth Nissan’s while dumping cash on Mitsubishi if it’s buying some degree of operational control. At present, though, the smaller carmaker’s board is overwhelmingly dominated by veterans of the Mitsubishi keiretsu (the interwoven networks of enterprises that dominate Japanese business), despite group companies holding less than 28% of the shares in Mitsubishi Motors, based on its most recent annual report.
Nissan’s cash pile
Ghosn has dined out for almost two decades on how he took on the now all-but-forgotten Nissan keiretsu and won, but in that instance he was dealing with an industrial group that was already fatally wounded by Japan’s 1990s property crash and the 1997 collapse of its life insurance business.
In this case, the carmaker’s largest shareholder, Mitsubishi Heavy, is forecasting its highest operating profit in at least a quarter of a century next year. The company hasn’t been asked to help its automotive affiliate yet, but it’s reasonable to assume it will have an ongoing interest.
Ghosn’s diplomatic skills have enabled him to hold together the Renault-Nissan alliance for 17 years while adding a manufacturing tie-up with Daimler and control of Avtovaz, owner of Russia’s Lada brand. As empires grow bigger, though, they get harder and harder to manage. His biggest test is still ahead. Bloomberg