Published reports on Monday indicate that Volkswagen’s truck division will acquire a stake in Navistar International Corp. and sell engines to the American truck builder, according to Reuters, the Wall Street Journal and the Economic Times.
The deal, which could be announced by VW and Navistar on Tuesday, would give the German-based company a foothold in North America and could threaten Cummins’ strong supplier relationship with Navistar, noted Stifel, a stock and industry analyst firm, in reacting to the reports on Monday.
Just how big a stake the company is buying was unclear. Reuters reported 19.9% while the Wal Street Journal said 17%.
Reuters said Volkswagen has agreed to supply engines to Navistar as part of the deal, quoting an unnamed source. Reuters also noted that Volkswagen declined to comment and Navistar couldn’t be reached over the Labor Day holiday. Volkswagen will pay around $16 per Navistar share or about $223 million in total, the source told Reuters.
The WSJ says the two companies have been in on-again, off-again talks since early 2015. Sources told the Journal that they have agreed to cooperate on purchasing and developing new products.
Volkswagen reportedly would get two seats on the board of directors as part of the deal and would be joining a board that already includes representatives of activist investors Carl Icahn and Mark Rachesky, who each control about 20% of the company.
“VW has long been rumored to be interested in Navistar,” WSJ wrote. “The German company is a powerhouse in the global truck market, particularly in Europe and Brazil, but doesn’t sell many [make that any] large commercial trucks in the U.S."
“Navistar draws most of its sales from the U.S., Canada and Mexico and has a limited overseas business, making it a potentially good fit for VW. Navistar also has a strong dealer network that provides service and replacement parts,” reported the Economic Times.
Said Stifel, “We find those reports to be credible because it has been reported by multiple media outlets including Reuters and the Wall Street Journal, each citing multiple sources, and because the transaction is consistent with Volkswagen’s stated strategy of expanding into commercial vehicle markets where it is ‘punching below its weight class,’ which is most notably the North American market.”
The Economic Times observed that “Volkswagen's commercial vehicles division is trying to build itself into a global truck manufacturer, having absorbed Germany's MAN and Sweden's Scania, while Navistar is looking for a technology partner to build engines that can meet ever more stringent emissions rules.”
That European view disregards Navistar’s partnership with Cummins, which stepped in after Navistar’s previous management failed to meet emissions limits with its EGR-only strategy. Cummins now supplies exhaust aftertreatment equipment for Navistar diesels and complete engines which have proven popular with Navistar customers.
But Stifel said the deal, if it comes to pass, could further threaten Cummins’ truck engine business, which is already being reduced by truck builders’ moves toward further vertical integration, including with their own diesels.
Navistar, only slowly recovering from a steep loss in heavy and medium-duty trucks sales and a drop in its stock prices, could be helped by a better capitalized firm like Volkswagen, the reports said.