BREAKINGVIEWS-Nissan offers suitors daunting risk-reward trade

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Katrina Hamlin

HONG KONG, Feb 24 (Reuters Breakingviews) - At least Makoto Uchida knows his turnaround plan for Nissan Motor 7201.T is worth something. The beleaguered $11 billion Japanese carmaker’s CEO now has KKR KKR.N mulling an investment, Bloomberg reported on the same day he officially broke off merger talks with Honda 7267.T. Foxconn 2317.TW is interested, as still, is Honda – if Uchida leaves, according to the Financial Times. And now some Japanese bigwigs may want Tesla TSLA.O to buy a stake, the FT reported on Friday. There’s a clear prize: a successful overhaul could almost triple Nissan’s valuation, Breakingviews calculates. Trouble is, it’s a daunting risk-reward trade.

Nissan's automotive unit has been leaking red ink, with a roughly $1 billion operating loss in the first nine months of this financial year. Shareholders appear to ascribe it a negative value: the company's lending division alone is probably worth some $12 billion, based on the average of 80% of book value Japanese financial companies trade at, per Fitch.

Assume Uchida hits his goal of boosting the carmaking arm's operating margin to 4% for its March 2027 financial year. Using estimates gathered by Visible Alpha of $77 billion in annual revenue from selling 3.1 million vehicles, that'd bring in $3 billion. Lop off interest payments and 25% tax, and net profit would be $2 billion. Apply a multiple of just over 7 times earnings, the average for a basket of Japanese peers, and the manufacturing business would be worth $14 billion.

Such an improvement ought to bolster the finance unit, too, so value it at its estimated March 2027 book value of almost $16 billion, per Visible Alpha. The combined entity could then command a price tag of around $30 billion.

Getting there from here is a tall order. It would require proving that annual car sales will stabilise at around 3 million, having fallen to 3.4 million last year from almost 6 million in 2018. Uchida would also have to ensure that drivers will on average pay 8% more for their Nissan than they do now. The company has also been leaning on incentives to encourage purchases.

And he needs his plans to close factories and slash headcount to both succeed and not be undone by rising costs elsewhere. That could be hard: recent history shows Nissan's expenses are sticky, and the company has to boost investment in hybrid and electric vehicles.

External forces could make those requirements even harder. If implemented, U.S. President Donald Trump's import tariffs would hurt Nissan in its largest market; in its second-largest, China, it and other foreign brands are losing share to local rivals like BYD 002594.SZ, 1211.HK.

The prospect of finding synergies may give some potential suitors more stomach for these risks than others: Honda has its own auto unit, while KKR owns parts-maker Marelli, which counts Nissan as a major customer. Whoever gets involved, though, Uchida's company is in for a white-knuckle ride.

CONTEXT NEWS

A “high-level Japanese group” including Japan’s former prime minister Yoshihide Suga and former Tesla board member Hiro Mizuno has drawn up a proposal for Elon Musk’s Tesla to invest in Nissan Motor, the Financial Times reported on February 21, citing sources.

Later on the same day, Reuters reported that Suga's office said it was not aware of a plan to encourage Tesla to invest in Nissan, and that Mizuno said on social media that he had "absolutely no involvement" in what the FT had reported.

Private equity firm KKR is considering an investment in Nissan, Bloomberg reported on February 13, citing sources. The talks are in early stages, according to the report.

Honda Motor and Nissan ended talks regarding a possible merger, according to a joint statement on February 13.

On the same day, Nissan reported an operating profit of 31.1 billion yen ($202 million) in the three months to the end of December, 78% lower than the same period in the previous year. The company also lowered by 20% to 120 billion yen its forecast operating profit for the current financial year, which runs to the end of March.

Nissan's autos unit has sticky operating costs https://reut.rs/4buZt2F