(News Bulletin 247) – The two car manufacturers made significant progress on the Tokyo market this Tuesday, December 24. Honda shares mainly benefited from the announcement of colossal share buybacks, which should send a message of confidence.

The market seems to be giving, for the moment, the benefit of the doubt to the merger between Nissan and Honda. The two Japanese manufacturers announced on Monday that they were entering into discussions with a view to a merger which would be carried out via a joint holding company. This operation, which aims to create a new automotive giant powerful enough to resist competition from Chinese players and Tesla, must be finalized by August 2026.

The two groups made their engagement official after the close of the Tokyo Stock Exchange on Monday. So the market reaction was only observed on Tuesday, December 24.

Nissan gained 6% at the Tokyo close. A remarkable increase insofar as the title, which had certainly been trading in decline previously, had already gained 23.7% on December 18, when the Japanese daily Nikkei reported the existence of discussions between the two companies.

Since this press information appeared, Nissan shares have jumped more than 40%. On the Paris Stock Exchange, Renault, which holds 35.7% of the capital of its Japanese ally, gained 1.7% at the start of the session, and signed the largest increase in the CAC 40.

>> Access our exclusive graphic analyses, and gain insight into the Trading Portfolio

Nissan, big beneficiary of a rescue

The merger between the two companies could be seen as a lifeline thrown to Nissan, whose results have deteriorated in recent quarters. The group has twice in a row lowered its operating profit and net profit forecasts for the current financial year, and narrowly managed to generate a positive operating margin for the first half of its financial year (0.5%).

In November, the Japanese press reported that a Hong Kong-based activist shareholder, Oasis Management, had acquired shares. This type of movement occurs when investors look for undervalued companies that need a jolt (a change in strategy or governance, for example) to wake them up.

“Both automakers are struggling in China (interestingly, they have the same Chinese partner, Dongfeng), but Nissan is also facing major difficulties in the United States, where it has lost market share , in particular because it missed the hybrid wave (Honda was more successful in this country)”, Oddo BHF explained last week.

Honda’s massive share buybacks

On Monday, Honda Motors CEO Toshihiro Mibe had to answer several questions from Japanese journalists who described the merger as a way to save Nissan. The manager assured that this operation was not aimed at “rescuing” the Yokohama group and stressed that the launch of a recovery plan by Nissan constituted a sine qua non condition for this merger. Nissan CEO Makoto Uchida said the engagement did not mean Nissan would not get back on its own.

Honda, for its part, gained 12.2% on the Tokyo Stock Exchange on Tuesday. Which may seem paradoxical to the extent that Honda is perceived as the consolidator, and the one who bears the most risks in this marriage. Moreover, the stock fell by more than 3% last week, after information from Nikkei.

“I don’t know why Honda decided to do this now, before Nissan announced the details of its restructuring plan,” Seiji Sugiura, an analyst at Tokai Tokyo Intelligence Laboratory, told Bloomberg. with everything that Honda will have to deal with, it’s a little worrying,” he added.

Concomitantly with the announcement of its engagement with Nissan, Honda reserved a pleasant surprise for its shareholders on Monday.

The automaker said it would buy back up to 1.1 trillion yen, or around 6.7 billion euros, of its own shares.

Although share buybacks basically only amount to redistributing cash to shareholders (and in some way giving them back what they already own), these operations are generally well received by the market. Because they mechanically lead to accretion (higher earnings per share) and send a signal of confidence from management.

“The massive share buyback plan shows that Honda is trying to sweeten the Nissan merger pill for shareholders,” Julie Boote, an analyst at U.K.-based Pelham Smithers, wrote in a quoted note. by Bloomberg.

Political risks

As a reminder, the two groups indicated in a presentation that they were aiming for annual synergies linked to this merger of more than 1,000 billion yen, or approximately 6.1 billion euros, at cruising speed. The shareholders of Honda, which weighs four times more on the stock market than Nissan, should also become a large majority within the holding company which will bring together the two companies.

However, the merger will have to go through with the process, while the companies are present in the same markets. This suggests restructuring measures or even job cuts. And therefore potential political interference.

“Any transaction could prove complicated because of the possibility of Japanese politicians getting involved in the prospect of job cuts and because Nissan may need to extricate itself from its link with Renault,” stressed last week Russ Mold by AJ Bell.

Renault holds 35.7% of the capital of Nissan, which for its part owns around 15% of that of Renault. On Monday, the diamond group declared that it “takes note” of the announcements from Nissan and Honda. The Boulogne-Billancourt-based company added that, as Nissan’s main shareholder, it was considering “all options in the best interest of the group and its stakeholders”.

The merger between the two companies should be favorable to the French manufacturer, because it will give it more options to sell and therefore monetize its stake in Nissan. It will also allow it, if Renault retains all or part of its stake in the new group, to benefit from the better results expected from the new group, in particular from the synergies enabled by the operation.