MW Honda and Nissan have made merger talks official. Why Honda's U.S.-listed shares are flying.

By Barbara Kollmeyer

A combined company would be a top 3 or 4 carmaker, and would be sign of what some believe is much-needed consolidation in the auto industry

U.S.-listed shares of Honda Motor Co. soared on Monday, as the Japanese automaker made official its merger talks with Nissan and announced hefty share buybacks.

If a merger were to happen, some believe it would be a sign of much-needed consolidation in the auto industry.

Honda's stock $(HMC)$ jumped 16% in premarket trading, which if carries into the regular session, would the biggest one-day percentage gain since the record 19.6% rally on Oct. 28, 2008.

The rally comes two days after it closed at a 23-month low of $23.70 on Dec. 19.

Spurring on the stock jump, Honda said it would buy back up to $7 billion (1.1 trillion yen) of its own shares to improve the "efficiency of its capital structure," implement a flexible capital strategy and boost shareholder returns. Buybacks would begin on Jan. 6, 2025 and run through most of next year.

Nissan's U.S.-listed stock $(NSANY)$ fell 2.1% ahead of the open.

Honda and Nissan shares (JP:7201) made more modest gains during Asian trading, of 1.5% and 3.5% each. Shares of Renault (FR:RNO), which holds a 17% stake in Nissan, slipped 0.6%.

Following reports last week that talks were under way, the companies said they've signed a memorandum of understanding, which includes Nissan partner Mitsubishi Motors, to form a joint holding company. Mitsubishi will decide whether or not it participates by the end of 2025. The companies reportedly said at a press conference that they hope the holding company will become a listed entity by August 2026.

UBS analyst Joseph Spak said in a recent note to clients that rapid changes in the auto industry requires consolidation, tie ups and/or moves to improve capital efficiency.

Read: A Honda-Nissan merger would be a sign of things to come in auto industry, analyst says.

Such a merger would form a massive automobile company amid major challenges in the industry - new cars that are too expensive for many shoppers, competition from U.S. and Chinese-made electric vehicles from Tesla $(TSLA)$ and BYD (CN:002594) and sales that have been slipping for Nissan.

"A potential merger between Honda and Nissan would create a top 3-4 OEM, globally competing head-to-head with Toyota, VW and Hyundai Group, as well as benefiting from stronger economies of scale than peers with a strong production footprint spread across 50% Asia (20% Japan) and 40% in NA [North America]," a team of JPMorgan strategists told clients in a note last week.

Honda Chief Executive Officer Toshihiro Mibe, reportedly said at the press conference that the new entity would see an operating profit of -Yen1 trillion that would eventually reach -Yen3 trillion, with some -Yen30 trillion potential revenue.

Honda shareholders could use the bump of a merger. Down 10.68% year-to-date, the stock is on pace for its worst year since 2022, when it fell 19.65%.

-Barbara Kollmeyer

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December 23, 2024 09:23 ET (14:23 GMT)

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