Why Timing Could Be Right For A Nissan-Renault Merger

• Dominic O'Brien of Exane BNP Paribas commented in a note that "the stars may finally be aligning" for a full merger of RENAULT SA REGIE NAT RNSDF and Nissan Motor Co Ltd (ADR) NSANY.
• O'Brien noted that reports from media sources suggest the French government is in favor of a merger.
• The analyst added that both companies, the French government, and especially shareholders can be "satisfied."

Investors that mostly focus on Detroit's Big Three automakers may be missing out a compelling investment opportunity, at least according to Dominic O'Brien of Exane BNP Paribas.

In a report published Thursday, O'Brien argued that after more than 15 years of debate, the "stars may finally be aligning" for a merger between France-based Renault and Japan-based Nissan. The combined entity would create the third-largest car company with annual sales of around 140 billion euros.

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O'Brien cited media reports which suggested the French government is in favor of a fully merger Renault-Nissan entity. This would remove a "major obstacle" for any agreement to move forward as the French government would be able to maintain 10 percent economic stake in the new entity, which may increase to 15 percent given double voting rights. However, the topic of domicile for the new entity still remains and the French government would demand a minimum production and job level remains in the country.

O'Brien added that the profitability of both companies will converge by 2017 or 2018 and provide a "more equal footing for a full combination." The analyst also noted that at current valuations, a merger with no premium assigned to either company would result in a near 50/50 ownership split. In fact, at current share prices, the new entity would trade on just 7.1x 2017e P/E and 22 percent EV/Sales, for what could be a 6-7 percent EBIT margin business, pre-synergies.

Nevertheless, the analyst sees fair value for both companies close to 30 to 40 percent above their current market prices based on a comparison to their global peers.