Honda (TSE: 7267) and Nissan (TSE: 7201) are merging to become the world’s third biggest carmaker by 2026. The two companies announced the plans through a memorandum of understanding (MOU). The companies want to strengthen their position in the rapidly changing automotive industry that now includes electric vehicles (EVs) and autonomous driving.
Merger Details
The merger will create a new holding company and is expected to be completed by August 2026. The new company will have annual sales of almost $238.9 billion and net income of $7.2 billion. Honda’s enterprise value (EV) is currently almost $86 billion and Nissan’s is over $52 billion.
Honda will appoint the majority of the board members of the holding company to ensure a single direction. The combined global sales of the new company will be over 8 million units, making it a serious competitor to South Korean car manufacturers Hyundai (KOSE: A005380) and Kia (KOSE:A000270).
The companies are confident that merging will enable them to combine their resources and embrace new technologies more quickly. This merger is intended to enhance the sharing of manufacturing and research and development (R&D) resources, optimize production processes, and lower costs.
The goal is to simplify operations, boost efficiency, and enhance the competitiveness of the new company, especially in the expanding EV and autonomous driving sectors. Both companies have invested heavily in EVs and autonomous driving technology.
Industry Valuation Metrics
The auto industry’s valuation metrics have been volatile recently. Price-to-earnings ratios for major automakers range from 3x to 108x, reflecting market perceptions and investor interest in newer participants.
The Honda-Nissan deal, valued at over $138 billion based on their combined enterprise values, represents a significant consolidation.
Using an EV-to-Sales ratio to assess this valuation metric deal, for Honda and Nissan, their combined annual sales of $238.9 billion suggest an EV-to-sales ratio of about 0.6, which is relatively low for the sector, with a mean of 2.0x and a median of 0.9x (see Figure 1).
This could indicate potential value creation if synergies are realized. However, the merger value merger will depend on how well the companies execute their integration strategy. Investors seemed to approve the deal as both Honda and Nissan stocks were up on the news. That’s the market’s vote of confidence in the merger to grow and create value.
FIGURE 1: Auto Comp Table (click for a larger image)
Adding Mitsubishi to the Mix
The merger might be further complicated by the Mitsubishi Motors (TSE: 8058).
Mitsubishi is part of Nissan’s existing alliance and is considering becoming a part of the merged company. This decision could help expand the new entity’s global presence and introduce valuable technological expertise, opening doors for greater growth and innovation opportunities.
Why Now
Increasing competition from Chinese EV manufacturers and Tesla (NASDAQ: TSLA), who are rapidly advancing in both technology and market share, are helping to fuel this deal. By pooling resources and expertise, Honda and Nissan aim to accelerate innovation, reduce costs, and deliver high-quality, cutting-edge products to consumers.
Challenges remain as Honda and Nissan face issues in key markets such as China and the US. Nissan’s restructuring plan involves cutting 9,000 jobs and scaling back global production by 20%. A coordinated approach will be important to overcome these hurdles and realize the merger’s full potential.
That’s why a strategic and coordinated approach is needed to navigate the complexities of the merger and succeed in the long term.
Final Thoughts
The proposed merger between Honda and Nissan could be a significant shift in the auto industry. By sharing technology, improving operations, and aligning their strategic objectives, the new entity has the potential to reshape competition and establish new benchmarks for innovation and quality.
As the merger unfolds, attention will focus on how the two companies manage the complexities of integration and leverage their combined strengths. Their success will depend on their ability to adapt to changing market conditions as their competitors won’t remain still.
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