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VW buys 17% Navistar stake; full merger is possible

Issued at 2016-09-06



Volkswagen agreed to a wide-ranging technology and purchasing deal with U.S. truck maker Navistar International Corp. in exchange for a 16.6 percent stake, an alliance forged in part by the need to meet stringent emissions regulations.

Navistar said savings will come from procurement and technology collaboration, rather than job cuts.

The deal should help both sides cut costs, give Volkswagen's trucks business a long-desired foothold in North America, and provide a source of new engines for Navistar, which has been looking for a partner since 2010 when it failed to get approval from U.S. regulators for its heavy-duty diesel truck engine.

Volkswagen Trucks CEO Andreas Renschler said a full merger with Navistar is possible once a technology and procurement alliance between the two truck makers takes shape.

In a call to discuss a technology and procurement partnership unveiled by the two companies today, Renschler was asked whether he could foresee a full merger with U.S.-based truck maker Navistar.

"On our way to becoming a global champion all options are open," Renschler said.

Renschler repeated the answer when he was asked whether Volkswagen's truck and buses businesses could be spun off from the German parent company.

With few potential partners to choose from, Navistar is tying is fortunes to a company which, through its acquisition of MAN and Sweden's Scania, has amassed global truck engine expertise, but whose carmaking arm is grappling with a scandal over falsified diesel emissions tests.

Volkswagen will pay $15.76 a share for 16.2 million new Navistar shares, a 12 percent premium to Navistar's closing price on Sept. 2, the two groups said today.

Volkswagen Truck & Bus will hold Navistar shares for a minimum of three years and top-level executives from both parties will align product development and procurement processes, the companies said.

The pact was welcomed by analysts who said it could also bolster VW's chances of spinning off its trucks arm.

"A more global company with exposure to the profitable North American market will make for a better story should VW look to IPO its trucks business in the future," Arndt Ellinghorst, analyst at Evercore ISI said in a note.

The alliance, first reported by Reuters on Monday, will see the creation of a joint venture for procurement, which Navistar said would help it reach synergies of at least $500 million over the first five years.

Pooling VW and Navistar's procurement will create economies of scale from Volkswagen Truck & Bus's three major truck brands -- Scania, MAN and Volkswagen Caminhões e Ônibus -- in addition to Navistar's own International and IC Bus brands.

Navistar gains

In a statement, Navistar CEO Troy Clarke said: "Over the longer term, it is intended to expand the technology options we are able to offer our customers by leveraging the best of both companies." 

Clarke was a 35-year GM executive before going to Navistar in 2010. He became CEO at Navistar in 2013. He last served GM in 2009 as president of GM North America. 

By year five, Navistar expects the VW alliance to generate annual savings of at least $200 million, which could rise further as the companies continue to introduce technologies from the collaboration.

Navistar said savings will come from procurement and technology collaboration, rather than job cuts.

Emissions standards

U.S. regulators last month announced new environmental standards designed to cut greenhouse gas emissions from medium and heavy-duty trucks by up to 25 percent by 2027, adding pressure on Lisle, Ill.-based Navistar to seek a technology partner. 

The financial burden of developing next generation engines to meet new emissions standards is forcing several vehicle makers to pursue partnerships and technology deals. 

In May, Nissan took a 34 percent stake in Mitsubishi, while in 2013, Aston Martin agreed to sell a 5 percent stake to Mercedes-Benz parent Daimler in exchange for delivering next generation engines and electronics that meet the latest emissions rules.

Gaining traction in the U.S. heavy-truck market, dominated by Daimler AG, Volvo AB and Paccar Inc., is key to VW’s plan to forge a global commercial-vehicle operation with higher profit margins than rivals. The marriage is not without risk given Navistar’s shrinking market share in the U.S., a country that has also confounded VW. Even before the diesel-cheating scandal, Volkswagen’s car sales were slipping behind competitors in the region.

Working with Navistar will provide access to technology and designs targeting customers in the U.S., where model lines are wholly different from offerings in the rest of the world. Many U.S. truck drivers prefer vehicles with an elongated nose, while European operators buy trucks with a flat face due to length restrictions.

Volkswagen, Europe’s biggest carmaker, tapped Renschler in May 2014, who ran Daimler’s truck operations, to push a stalled plan to deepen cooperation between its MAN and Scania brands.

Munich-based MAN and Swedish counterpart Scania don’t sell vehicles in the U.S., and the group’s only other large truck making operation is a VW-brand division in Brazil focused on Latin America. MAN has a Chinese joint venture with local affiliate Sinotruk Hong Kong Ltd. that sells models in Asia.

Entering the U.S. will give VW access to a market a bit smaller than its current home region. Around 240,000 trucks will be sold this year in the U.S., while 290,000 will be bought in Europe, according to estimates from Volvo.

Cost savings

The Volkswagen Truck & Bus division has been largely unaffected by the diesel-emissions scandal that erupted at the group’s car operations a year ago. It’s targeting 1 billion euros ($1.12 billion) in long-term cost savings through closer collaboration among its brands. Renschler has said VW is keeping all options open as part of his expansion strategy, including acquisitions and a possible share sale.

Navistar is no stranger to dramatic consequences from emissions-related troubles. The company had to kill most versions of its so-called premium vocational trucks in 2010 because they lacked diesel engines that complied with U.S. federal air-pollution rules. Navistar’s market share has tanked since its pollution-control technology failed to meet industry standards and brought the company to the brink of collapse.

Activist investors Carl Icahn and Mark Rachesky have accumulated a combined stake of almost 40 percent in Navistar since 2011. Declining demand for heavy trucks in North America, which led Daimler to cut the profit outlook for its truck unit earlier this year, has only added pressure on the U.S. manufacturer.


Source: Auto News



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