Renault Looking To Revive AvtoVAZ

Renault has emerged the winner to buy a 25 percent stake in AvtoVAZ as the French carmaker looks to reinforce its position in what will soon become Europe's largest car market and help the Russian giant resuscitate its troubled Lada brand.

On Saturday, Renault president and CEO Carlos Ghosn and Sergei Chemezov, head of new state holding Russian Technologies, which includes AvtoVAZ, signed a memorandum of understanding in Tolyatti, agreeing to help revive the Lada brand and share technological expertise.

Renault beat out a number of competitors, and the move came as a surprise as many analysts expected companies like Italy's Fiat or Canadian car parts giant Magna to be the front-runners.

Renault's negotiations with AvtoVAZ lasted the longest of all the bidders and the conditions of the deal changed repeatedly, said one industry source familiar with the negotiations, who spoke on condition of anonymity because he did not have permission to discuss the deal with the media. That Renault finally emerged the winner may also be a sign that lobbying by French President Nicolas Sarkozy with President Vladimir Putin might have helped the French firm get the inside track.

"A major task, which we've been working on for two years, since Rosoboronexport assumed control of AvtoVAZ, is finally completed," Chemezov said, Interfax reported Friday. "We have now decided with which company we are going to develop the auto industry."

In 2005, the Kremlin handed officials at state arms trader Rosoboronexport, which has since been folded into Russian Technologies, the job of turning the company around. Initially, the company said cooperation with foreign partners would be limited to parts and equipment, but it later realized that AvtoVAZ, with its 40-year-old equipment and outdated designs, could not make it on its own.

The companies declined over the weekend to specify the price Renault will pay for the 25 percent stake, but Chemezov said the French carmaker beat out U.S. General Motors, Italy's Fiat, Canada's Magna and Germany's Volkswagen by offering a "fair price, close to market price" and technological expertise.

Renault chief financial officer Thierry Moulonguet said in a conference call Saturday that the market value of AvtoVAZ was $5.7 billion and that his company paid "reasonable multiples" for the stake, Reuters reported. Bloomberg estimated the stake at $1.36 billion, based on the carmaker's market value of $5.44 billion Saturday evening.

Russian Technologies will form a joint venture with Renault to own 50 percent of AvtoVAZ, Renault said in a statement.

Under the agreement, the companies will share manufacturing and marketing expertise and technology, carry out exchanges of executives and cooperate on engines and gearboxes to equip cars made by both companies, the statement said.

The French carmaker stressed that it would help develop the Lada brand "while respecting its identity, in order to maintain its leadership."

The intention to boost the Lada brand, which boasts clunky small-car designs it inherited from Fiat 40 years ago, appears to be a sharp turnaround from the start of the talks, when Renault initially proposed to use AvtoVAZ facilities to produce vehicles under the Renault brand, the industry source said. AvtoVAZ initially termed the conditions "unacceptable," but later agreed, the source said last week.

"We are ready to retain the individuality of the plant. It's a win-win situation," Ghosn said Saturday, RIA-Novosti reported.

The deal comes at a time when the automotive market in Russia is developing at an unprecedented pace and AvtoVAZ continues to bleed market share as foreign carmakers set up shop in the country. Renault, in cooperation with the Moscow government, already operates a plant in the city, and associated Japanese carmaker Nissan is building its own plant in St. Petersburg.

Renault hopes the tie-up will significantly enhance the Renault-Nissan alliance in Russia, which is expected to become Renault's priority market.

Renault said it had agreed with AvtoVAZ and its shareholders that Lada sales volumes would be consolidated into sales figures for Renault, which would consequently revise its 2009 forecasts upward.

Ivan Bonchev, an automotive analyst with Ernst & Young, said this would help Renault boost its profits and further reinforce its global position. "Carlos Ghosn has very ambitious plans," he said.

The Russian market is expected to overtake Germany's in several years, to reach 3.5 million to 4 million cars sold by 2015, up from 2.3 million in 2007, Moulonguet, Renault's CFO, told reporters. AvtoVAZ has the potential to increase its share of the Russian market to 40 percent from 30 percent, Moulonguet said, Bloomberg reported.

Chemezov said the companies would continue jointly to develop a Class C platform, and a car based on that platform should cost from $12,000 to $15,000, RIA-Novosti reported. The partners will also work to build a Class B platform, Chemezov said, adding that AvtoVAZ wanted to receive transmissions and engines from Renault. It will take some $900 million to upgrade the Tolyatti plant and develop the Class C platform, Chemezov said.

Ghosn said plans were to ramp up annual capacity at AvtoVAZ to 1.5 million units so that the plant could also assemble Renault and Nissan cars in the future.

Renault is expected to seal the purchase before Feb. 25, RIA-Novosti reported, citing the memorandum. AvtoVAZ has a complicated ownership structure, with a number of its subsidiaries owning a joint 66.5 percent of the carmaker. After Friday's board meeting, AvtoVAZ released a separate statement saying it needed to integrate its subsidiaries before it could formally sell a stake, adding that it planned to finish this process over the next six months. AvtoVAZ also said it had scheduled an extraordinary meeting of shareholders for Jan. 28.

Renault fought off strong competition for the tie-up with AvtoVAZ. Many industry observers considered Fiat, which offered to share platforms and engines, to be the front-runner. Others thought Magna, which is 20 percent owned by Russian billionaire Oleg Deripaska, who also controls Russia's No. 2 automaker, GAZ, would emerge the winner. Some thought that GM, which has been producing vehicles with AvtoVAZ at their joint venture in Tolyatti since 2001, would get the nod. Relations between the two, however, have been soured by a series of disputes.

The choice of the French company may have been decided at the very top level. In October, the recently elected Sarkozy came to Moscow, where he called Putin "dear Vladimir" and said France wanted to be Russia's "privileged partner."

Sarkozy was also virtually the only European leader who congratulated Putin on United Russia's landslide victory in the Dec. 2 State Duma elections.

Kommersant, citing sources close to the Tolyatti plant, reported Saturday that the AvtoVAZ-Renault tie-up had been approved by Putin. Bonchev expressed doubt that Putin personally chose the partner for AvtoVAZ but said political factors should not be discounted altogether.

This was not the first time a French company unexpectedly won in a high-stakes investment competition. In July, state-controlled Gazprom offered a 25 percent stake in the company operating the giant northern Shtokman gas field to France's Total after lengthy negotiations with it and other foreign companies.