Renault and AvtoVAZ Agree Joint-Venture MoU to Accelerate Renault Takeover

The Renault-Nissan alliance and state investment corporation Rostekhnologii have agreed a memorandum of understanding (MoU) to create a joint venture (JV) company as a vehicle for Renault-Nissan to complete a full takeover of Russia's largest carmaker by 2014. According to a press release the two companies signed the agreement, which was described as non-binding, in Paris yesterday. The MoU means that the Renault-Nissan alliance and Rostekhnologii will contribute their respective stakes to a new JV company that will control AvtoVAZ. Renault-Nissan will invest in the region of USD750 million in the JV, which will give it a 67.13% stake by mid-2014. The JV company will then hold a 74.5% stake in AvtoVAZ. Renault, which already owns a 25% stake in AvtoVAZ that it acquired in March 2008 will invest USD300 million in the JV, while Nissan, which does not currently own a stake in AvtoVAZ, will pay USD450 million. The two companies will make payments in stages.

Rostekhnologii has agreed to restructure its outstanding loans with AVTOVAZ with approximately RUR7 billion (USD238 million) proceeds from the anticipated sale of AvtoVAZ's non-core assets being used to repay part of Rostekhnologii's loans. The remainder of AvtoVAZ's interest-free debt with Rostekhnologii, which has been put at USD1.56 billion, is being extended well beyond its current maturity. The press release stated that this gives AvtoVAZ "a strong balance sheet with no liquidity constraints." Commenting on the announcement of the MoU, Renault-Nissan alliance CEO Carlos Ghosn said, "Today's memorandum is the latest step in an expanding collaboration that helps modernize the leader of Russia's auto industry. Just as Renault and Nissan will continue their technology transfer to AVTOVAZ plants, our AVTOVAZ colleagues will contribute more and more to the Alliance's multicultural management bench."

The release added: "The Renault-Nissan Alliance will now perform financial, legal and environmental due diligence over the coming months. The parties expect to sign definitive agreements and close the transaction by the end of 2012, subject to customary regulatory approvals."

Outlook and Implications

While there is no doubt that this is a solid step towards the Renault-Nissan alliance taking full control of Russia's biggest carmaker, it should by no means be taken for granted that the deal will progress smoothly to its conclusion in 2014. Behind the scenes there is little doubt that the relationship between Renault and AvtoVAZ has been fraught with management, financial and legal difficulties. Renault originally purchased a 25% stake in AvtoVAZ for USD1.17 billion back in March 2008, perhaps the worst possible time to complete the transaction. Months later, the Russian passenger car market collapsed as the country's economy was one of the worst hit by the global downturn. The car market halved to 1.4 million, as did AvtoVAZ's sales, and the full extent of its precarious financial state was revealed. It was bailed out by its Russian government stakeholders and the Russian market has also staged a strong recovery. However, AvtoVAZ is still largely in a position where it is competing with an outmoded model range which it can only sell on price.

Renault has been trying to help AvtoVAZ with new model development since that point but it speaks volumes about the difficult gestation the relationship has had that only now—more than four years after the initial Renault stake acquisition—is AvtoVAZ ready to bring its first Renault-based model to market, in the form of the AvtoVAZ Largus MPV and Van, which is based on Renault's Logan B0 platform. However, there have been other recent signs that the momentum for Renault-Nissan to take full control is accelerating. AvtoVAZ recently installed a new production line at its giant Togliatti plant which has been installed with Renault-Nissan's technical help, to manufacture the Largus and other new Lada, Renault and Nissan-badged model (see Russia: 10 April 2012: Renault-Nissan Launches New Production Line at AvtoVAZ's Togliatti Plant). However, the idea of Renault taking full control of AvtoVAZ has been being floated since the end of 2010 and it rather begs the question why the deal has taken so long to progress to the stage of an MoU. They have needed to agree on the structure of the JV and this seems to be a tangible step towards completing the deal but further delays and obstacles to the deal cannot be ruled out, especially if Renault-Nissan has still to complete full due diligence on AvtoVAZ, which it can be assumed will be a task fraught with complexity. We will wait to see whether the definitive agreements mentioned above will be signed by the end of the year, although this will at least be confirmation that the deal is progressing according to plan.