Volkswagen Navistar Stake Move Will Boost Truck Business.
Look Out For Full Bid, Ahead of Long-term Plan To Sell Truck Unit.
“strong in Europe, Latin America, (VW) lacks exposure to one of the largest markets, and one with the highest operating profit margins”
Volkswagen’s decision to buy a stake in U.S. truck-maker Navistar International was applauded by investors, who eventually expect a full bid from VW for the company on the way to beefing up its global commercial vehicles business then selling it off.
VW said it would buy a 16.6% stake in Navistar.
The deal means Navistar would have access to VW engine technology, a weak spot for the U.S. company since it failed to get approval for its big new diesel truck motor.
VW is paying about $255 million for the stake, a 12% premium to Navistar’s last closing share price, the companies said.
Since the problem with approval of its diesel engine, Navistar has seen its share of the heavy-duty truck market halve and now stands at about 11 per cent. Daimler-owned Freightliner has about 40 per cent, followed by Paccar Inc with Peterbilt and Kenworth, then Volvo’s Mack. Navistar, which lost $184 million in its 2015 fiscal year, sells mostly in the U.S., Canada and Mexico where VW is weak, and is seen as a good fit by analysts. VW owns European brands MAN and Scania.
Reuters BreakingViews analyst Olaf Storbeck said the deal appeared to contradict CEO Matthias Mueller’s strategy of simplifying the overly complex empire of 12 brands and 600,000 employees, but might well be a step to building a global truck unit which would be easier to sell.
“Plans to acquire a minority stake in U.S. truck maker Navistar sound like a return to old expansionist habits,” Storbeck said, adding if VW’s past acquisition strategy is a guide this may just be the first step in a full-blown takeover.
“Expanding in North America is the next logical move (after buying MAN and Scania) in building a truly global trucks division – while strong in Europe and Latin America, (VW) lacks exposure to one of the largest markets for trucks, and one with the highest operating profit margins,” Storbeck said.
Storbeck pointed out Navistar botched the development of a new generation of cleaner engines, and had reported losses for 14 of the past 15 quarters.
Citi Research said the deal makes sense, but is risky too. Taking a small stake at first was sensible.
“”It may be argued that power-train technology is precisely the remedy Navistar needs, but we suspect it is a bit more complicated than that. Some investors are likely to be worried this provides another U.S. problem for management to fix, but we think there is enough management to make this a good opportunity for the longer term,” Citi Research analyst Michael Tyndall said.
“This is a step toward becoming a global player in the truck market, which as one of the ambitions set out by new Truck CEO Andreas Renschler in his May 2015 presentation. So whilst the deal might be a good technology challenge it is by no means an easy fix for VW,” Tyndall said.
Investment researcher Evercore ISI liked the deal, saying it gave VW a position in an underperforming business which was restructuring.
“We also believe a more global (truck) company with exposure to the profitable North American will make for a better story should VW look to IPO its truck business in the future. For us this would be a major positive catalyst for VW and its investors,” said Evercore ISI analyst Arndt Ellinghorst.
The Wall Street Journal’s Heard on the Street column, in a commentary headed “Why the market is betting on a full Navistar takeover”, said VW’s engineering technology will help Navistar cope with an upcoming potentially disruptive period driven by tougher emissions regulation and digital technology.