March 20, 2019 / 4:30 PM / 4 months ago

Breakingviews - BMW-Daimler: a more logical German M&A champion

The logo of BMW is pictured during the first press day of the Paris auto show, in Paris, France, October 2, 2018.

LONDON (Reuters Breakingviews) - Berlin is pushing for the wrong German M&A champion. Officials including Finance Minister Olaf Scholz want to help embattled Deutsche Bank by merging it with Commerzbank. In reality, the combined 26 billion euro lender would probably be just as dysfunctional and still struggle to earn its cost of capital. Encouraging a 102 billion euro auto giant via a union between BMW and Daimler makes more sense.

Munich-based BMW’s 2018 results on Wednesday illustrated the problems facing premium carmakers. The 47 billion euro group reported a 0.8 percent decline in annual revenue to 97.5 billion euros, hit by slowing global car sales and the trade war. Chief Executive Harald Krueger expects his automotive operating margin this year to be between 6 and 8 percent, compared with an old target of 8 to 10 percent. That’s partly because of the high cost of investing in new technologies for electric and autonomous vehicles.

Daimler faces the same issues, with analysts pencilling in a meagre 7 percent operating margin this year. The duo now trade at less than seven times forward earnings, using Refinitiv data, compared with over 12 times in 2015.

A deal could help. It’s cheaper to build cars, whether electric or combustion-based, using the same basic design components or “platforms”. Partners Renault and Nissan Motor in 2017 reported synergies worth 4 percent of their combined cost base. At just half that rate, Daimler and BMW could squeeze out 5 billion euros of annual savings with a present value of 35 billion euros – one-third of their combined market value – assuming a 30 percent tax rate and a multiple of 10. They’ve already formed a joint holding for their car-sharing, ride-hailing and other futuristic ventures, and are discussing closer electric-vehicle cooperation, according to Sueddeutsche Zeitung and Auto Bild.

One obstacle is that key decision-makers may lose their jobs in the combined entity, making a deal less likely. Moreover, BMW’s smaller market value means family shareholders Susanne Klatten and Stefan Quandt would probably end up yielding control of the combined company.

Still, the new group would be better placed to compete with Volkswagen and fast-growing electric specialists like Tesla. It would be invulnerable to M&A raids through sheer size, which should please German policymakers alarmed when China’s Geely grabbed an almost 10 percent Daimler stake last year. The risk is that, as with Deutsche, they wait until the companies are beyond saving.

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