(BFM Bourse) – The automaker still plans to spin off this promising division separately. But there is a risk of cannibalization with the Renault stock and the market context may be unfavorable to fully crystallize the value of this asset.
It is perhaps Renault’s project that attracts the most market attention. The diamond group recently confirmed its plan to separate the accounts of Ampere, its future subsidiary dedicated to electric vehicles and software (on-board software), with a view to an IPO.
On Thursday, CFO Thierry Piéton explained that the company had surveyed investors about the initiative, and the feedback confirmed both the need for Ampere and the market’s appetite for the investment opportunity. The manager added that the manufacturer was looking for “the most favorable window of opportunity” to complete the IPO. This window should “most likely” occur in the first half of 2024, he continued. The group has previously indicated that it wanted to make this introduction from “the end of 2023”.
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Mentioned then confirmed last year, especially during the day dedicated to investors in November, this operation has a clear and usual logic in the stock market. The market often tends to favor separately listed activities. The stock market listing of Ampere must thus help crystallize value. Renault has never given a target for the valuation of its future subsidiary, but could say more during an investor day dedicated to Ampere and scheduled for the second half of 2023.
However, indiscretions from the Reuters and Bloomberg news agencies reported a potential valuation around 10 billion euros. Bernstein, for its part, calculates an enterprise value (therefore debt and cash included) of between 20 billion and 30 billion euros, using a multiple of two to three times the expected sales in 2025 (slightly less than 10 billion euros in 2025 according to forecasts from the design office ). But Barclays, on the other hand, is much more cautious, judging a valuation of just 5 billion euros “globally appropriate”.
Float the question
Beyond these questions of amount, is this operation entirely appropriate for the future of Renault and Ampere? Separating the accounts is certainly a good idea in the sense that it gives the market indications of the performance of Renault’s electrical activities. Going public carries its share of risks that should not be underestimated. “Do We Really Need an IPO?” asked Bernstein last week, who nevertheless has a piece of advice to “outperform” the group.
The float can be a source of questions. Car supplier Faurecia, before seeing PSA exit its capital (via a distribution to its shareholders) following the merger with Fiat Chrysler to give birth to Stellantis, suffered from a liquidity discount in the market due to limited float.
On this point, Renault intends to keep “a strong majority” in the capital Ampere. The Japanese ally of the group with the diamond Nissan intends to take up to 15%. In addition, the American technology group Qualcomm and Mitsubishi, the third member of the Renault-Nissan-Mitsubishi alliance, also intend to invest. Assuming their holdings are between 2% and 5%, the free float can vary between 20% and 30%. Renault CEO Luca de Meo has repeatedly indicated that the group knows the rules of the game on this point and intends to let investors float enough. “The smallest free float is probably around 20%”, estimates Michael Foundoukidis, analyst at Oddo BHF.
It must be emphasized that a limited free float does not necessarily prevent the good performance of an IPO. The success of the IPO of Porsche, a subsidiary of Volkswagen, demonstrated this well last fall. Conversely, the IPO of Traton, a truck manufacturer that also belongs to Volkswagen, had not been a big success in 2019. The float then represented only about 11.5% of the capital.
Risk of cannibalization?
Another risk is associated with the valuation of Ampere: cannibalization, that is, investors mediate the two actions by selling Renault shares to buy them in Ampere. This phenomenon was observed during the introduction of Porsche by Volkswagen, with the drop in action of the “mass market” car manufacturer, while its highly advanced subsidiary experienced thunderous first steps on the stock market (the share price of Porsche is currently trading 30% above its October IPO).
“The IPO is not necessarily a good idea, we can clearly see that the crystallization of value takes place in the ‘newco’ (the newly listed company, editor’s note) and not at the level of the holding company (the mother of the house) or even to damage to her”, underlines an analyst.
Asked during Renault’s general meeting in May about this specific point, the group’s financial director, Thierry Piéton, explained that by creating a “franchise dedicated to electric vehicles, as efficient as possible, with all the possibilities from a resource point of view” – and therefore, by appealing, the group would to the market to maintain Renault’s balance sheet and thus not draw on its liquidity reserves. “The benefit for the Renault shareholder is that by doing this we will allow Ampere to develop more easily, to grow faster, to develop more products, to better integrate the value chain. So if I’m a shareholder in Renault, I actually have to see the potential IPO (ed. note) of Ampere as a lever that will improve the group’s performance and thus Renault as a whole”, elaborated the manager.
To make his remarks concrete, Thierry Piéton declared “that it was better to be a 75% shareholder in something that earns 2 billion euros than to be a 100% shareholder in something that earns 0.5 to 1 billion euros”, and specified however, that these figures were taken “randomly”, just for illustration.
A context that is not necessarily obvious
In addition to these technical considerations, there remains the market context. “The timing is difficult, everyone has in mind that Tesla does not hesitate to lower its prices and sacrifice its margins to chase market share, and also that many Chinese groups such as MG (subsidiary of SAIC, editor’s note) and BYD have launched an offensive on electricity with very low prices that also takes market share there,” argues the previously mentioned anonymous analyst. “It is not necessarily an environment that is conducive to an IPO in the electric vehicle,” he adds.
“Investor appetite for EV companies has waned in recent months, putting pressure on (Renault’s) management to explain how Ampere’s investment case is different,” Jefferies analyst Philippe Houchois wrote in a March 20 note, cited by Bloomberg.
“We are concerned that Ampere’s IPO plan was established several years ago in a very different climate and we encourage the Renault team to reassess its plans in light of current developments and the “lack of valuation success of other spin-offs in the sector ,’ warned Bernstein analysts in a note released last week.
Michael Foundoukidis is more nuanced. “Ampere’s stock market listing is not a foregone conclusion, due to the competition with Chinese groups in the electrical sector in particular. However, by carrying out this stock market listing in the first half of 2024 and not at the end of 2023 (as the group therefore seems to foresee it , ed. note), Renault would probably offer greater visibility to the market”, explains the analyst from Oddo BHF.
“The group would reduce the delay in relation to the calendar in relation to the financial equilibrium targeted for Ampere (2025 on margin and cash flow, editor’s note). And the operation could then be based on the launches, planned at the beginning of the year , of two key electric models, namely the new Scenic and Renault 5”, he adds.
It should also be remembered that the diamond group has always ensured that it would be aware of market conditions, not ruling out postponing the IPO if these conditions were not met. But from there to giving it up completely? In any case, Barclays estimated at the end of May that the company could abandon this operation if the valuation of Ampere did not exceed 5 billion euros.
Julien Marion – ©2023 BFM Bourse