Renault, the French auto manufacturer, owns significant stakes in publicly traded companies, including Nissan, Volvo and Daimler. One can effectively hedge out (i.e., short) Renault’s ownership interest in these entities and create a “stub” representing Renault’s own auto manufacturing operations. Given that the pre-tax value of Renault’s public stakes is worth approximately 130% of its own share price, one is effectively being paid to own Renault. Recently, we took advantage of our flexible mandate to create the so-called Renault stub and have the market pay us €5 billion to own Renault’s core operations, which earned pre-tax income in excess of €1 billion in 2011. Though Renault faces a tough operating environment in Europe, we believe its auto business is worth something. Therefore, we purchased Renault and shorted Nissan and Volvo. Over the past decade, the Renault stub has experienced periods of both positive and negative valuation in the market. We first executed this trade profitably in 2006 and now, given its healthier balance sheet, better geographic mix and improved profitability, we are happy to reestablish a position. We believe the value that is being given away has less financial risk than in the past. If the Renault stub trades up to just a zero value, the outcome would be nicely accretive.
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