PARIS (Bloomberg) -- Renault SA's mishandling of an espionage investigation has weakened CEO Carlos Ghosn in a tussle with the French state, its largest shareholder, over the carmaker's future, four people familiar with the matter said.
Fallout from the spying affair, in which Renault says it may have been hoaxed into firing three executives, will make it harder to win government support for changes to an alliance with Nissan Motor Co., said the people. Renault wants to reduce its Nissan stake and allow the Japanese carmaker to vote as a Renault shareholder, they said, declining to be named because the matter is confidential.
"The market doesn't appreciate the current alliance structure because it has failed to unlock value for investors," said Torkell Eide, who helps manage $16 billion for Stavanger, Norway,-based Skagen Funds, Renault's fifth-biggest private shareholder. "The pressure on them to do something about it can only increase."
The maker of Megane hatchbacks and low-cost Dacia cars is facing a management crisis after Chief Operating Officer Patrick Pelata voiced doubts March 4 about evidence behind the January dismissals and offered to resign if all three executives are cleared of selling secrets.
The setback came three weeks after Ghosn presented a medium-term plan to narrow the profitability gap with Volkswagen AG, telling investors that Renault-Nissan's capital structure "can change over time and probably will."
Renault has discussed plans to reduce its 43.4 percent Nissan stake and restore voting rights to the Japanese carmaker's reciprocal 14.5 percent Renault holding, according to the same people, who have knowledge of discussions within the alliance and the government. The government is wary of the move because it would almost neutralize the voting clout of its own 15 percent stake, they said.
Ghosn, who also heads Nissan, encountered official resistance when he took the proposal to France's AMF market regulator in 2008, then revived the idea this year, according to the people. The espionage case makes it even less likely that President Nicolas Sarkozy's government will give the approval needed to reduce Renault's Nissan holding, they said.
"Renault currently has no plans to reduce its stake in Nissan," alliance spokeswoman Rachel Konrad said, declining to comment further. AMF spokeswoman Christine Anglade said the market watchdog had no comment.
Nissan is barred from voting its shares because it is deemed to be controlled by Renault under French law. A company is presumed to be under the control of any single shareholder with a 40 percent stake or more, which means Renault could open the way for Nissan to exercise its votes by selling as little as 3.5 percent of the Japanese carmaker's shares.
Renault's 12 billion-euro ($16.8 billion) market capitalization is almost 30 percent lower than the value of its own stakes in Nissan, Volvo AB and Daimler AG, worth a combined 17 billion euros at the last market close. Renault shares have risen 22 percent over the past 12 months, compared with a 56 percent gain for Fiat S.p.A. and a 67 percent increase for VW's preferred stock.
Investors frustrated by Renault's low share price have pressed for either a full Nissan merger -- which Ghosn has refused to consider -- or a sale of the undervalued holdings. "The French automaker run by the dynamic Carlos Ghosn has underperformed the recovery of the auto sector," New York-based Jana Partners LLC said in a letter to investors ahead of Renault's strategy presentation.
Excluding it holdings, "Renault has a negative value," said the fund, which owns Renault stock among equity investments that also include General Motors Co. and Apple Inc. The French carmaker's October sale of part of its Volvo stake will prove to be "the beginning of a more comprehensive plan," it predicted.
Besides lifting Renault's stock, Ghosn believes that giving Nissan a vote and narrowing the gap between the reciprocal shareholdings would fairly reflect the Japanese carmaker's faster growth and bolster the alliance, three people said. Nissan's revenue has surged more than 45 percent in the decade following its 1999 rescue from near-bankruptcy, while its rescuer's sales have shrunk 3 percent.
Renault now needs Nissan more than the reverse, and the Japanese carmaker's executives are sometimes frustrated by French government-imposed constraints on the alliance, the people said. One cited the decision to begin European electric-car battery production in France as well as the UK and lower-cost Portugal.
Ghosn has also clashed with ministers over his 9.2 million-euro ($12.9 million) salary and was last year forced to backtrack on plans to transfer French production of the Renault Clio subcompact to Turkey, after Sarkozy summoned him for a public dressing down. The bungled espionage case gives the government more leverage in its regular face-offs with Renault's Lebanese-born boss.
"If it emerges that the three employees didn't betray their company, the CEO must take responsibility and apologize publicly, or tender his resignation," Marc Laffineur, deputy leader of Sarkozy's UMP party in the National Assembly, said after the carmaker backed away from its earlier allegations.
Renault, which in January fired management committee member Michel Balthazard and two other executives accused of spying, acknowledged earlier this month that its case against them was based on verbal information about foreign bank accounts for which it paid 250,000 euros, without knowing who supplied it. Police failed to find any trace of the alleged accounts in Switzerland and Liechtenstein, where legal authorities cooperated with the investigation.
Dominique Gevrey, the Renault security manager who passed the banking information to managers without disclosing its source, was arrested March 11 and was due to be charged late Sunday with "organized fraud," a court official said.
Renault second-in-command Pelata, who took over day-to-day control from Ghosn in 2008, offered March 4 to resign if all three executives are cleared, saying the company would hold management accountable "all the way up to me."
Under the mid-term strategy, Renault aims to restore its auto division to consistent profitability by building more cars outside western Europe and sharing more designs and production with Nissan and Daimler. It also expects to command a 40 percent share of the fast-growing Russian market thanks to a $1 billion investment in OAO AvtoVAZ, now applauded by some analysts who initially thought the 2008 purchase was too risky.
"For the first time in a decade, they have everything they need to deliver growth," Philippe Houchois, a London-based analyst with UBS, said in an interview. "Then along comes the espionage scandal, with the potential to undermine that," Houchois said. "Renault needs competent and credible operating management to take advantage of its situation, but it's not clear who would replace Pelata."