News broke late Jan. 30 that Volkswagen’s global truck unit, Traton SE, is finally making its long-anticipated bid to fully acquire all stock holdings of Navistar International.
Since 2016, Volkswagen, through subsidiary Traton, has acquired a nearly 17% stake in Navistar. Now the company has made an unsolicited bid to acquire the remaining Navistar stake for $35 a share, representing a 45% premium on the company’s closing price of $24.07 a share on Thursday, according to a report in the Wall Street Journal. This would put Navistar’s total valuation at $3.5 billion, WSJ added.
Shares in Navistar rose 51% in after-hours trading.
Traton and Navistar
Traton was formed in 2018 out of Volkswagen’s Truck and Bus Group, in order to spearhead the German automaker's push to become a major player in the global commercial vehicle market. That bid included establishing a presence in North America – the world’s highest volume commercial vehicle market. To further that goal, Volkswagen had already developed a close relationship with Navistar, in 2016 announcing a strategic alliance that included various research and development projects. That alliance has helped lead to Navistar introducing a version of Volkswagen truck brand MAN’s diesel engine as the International A26 engine for International Class 8 trucks and more recently, a prototype electric medium-duty truck.
Navistar struggled in the wake of its controversial decision on how to meet the Environmental Protection Agency's emissions 2010 standards. It decided to forego selective catalytic reduction (SCR) downstream exhaust technology to reduce diesel emissions in favor of advanced exhaust gas recirculation (EGR) technology. The company’s MaxxForce family of diesel engines were plagued with technical issues, largely related to the significant increase in waste heat they generated due to their advanced EGR systems, and Navistar’s commercial vehicle market share and stock price suffered as a result.
Navistar endured a long series of lawsuits over the failure of the MaxxForce engines to perform as advertised, but settled all pending complaints and “closed the books” on those engines last year.
In a press statement, Traton said that as the global commercial vehicle industry continues to evolve, it believes that the proposed transaction is the logical next step and would result in even greater benefits. Traton said the combined company would be better able to meet the demands of new regulations and rapidly developing technologies in connectivity, propulsion and autonomous driving. Combining Traton’s leading position in the European and South American markets with Navistar’s presence in North America would create a leader with global reach and complementary capabilities, it said.
“Over the past three years, we have benefitted from a highly collaborative and productive strategic alliance with Navistar,” Traton CEO Andreas Renschler said in the press statement. “As the market continues to evolve, we believe there are compelling strategic and financial benefits to a full combination of Traton and Navistar. The proposed transaction would create a leader in commercial vehicles with global scale and a strong portfolio of leading brands and cutting-edge products, technologies and services while delivering immediate and substantial value to Navistar stockholders.”
The transaction would also provide substantial value to Navistar stockholders through an immediate and certain cash premium, it noted.
Will a Traton-Navistar Deal Happen?
Navistar issued a news release confirming the news of the offer, saying it would carefully review and evaluate the proposal, and advised its shareholders to take no action at this time.
“There can be no assurance that any negotiations between Navistar and Traton regarding this proposal will take place, and if such negotiations do take place, there can be no assurance that any transaction with Traton will occur or be consummated," the statement read.
A report in Barron's noted that one stumbling block could be the need to win over Navistar's largest shareholder, Carl Icahn, whose fund controls 16.9% of Navistar’s shares. "Icahn and two other activist funds, Mark Rachesky’s MHR Fund Management and Gabelli Funds, together own 40% of Navistar’s shares, according to Refinitiv data," Barron's reported. "Rachesky and another MHR executive, Raymond Miller, sit on Navistar’s board [of directors], as does a representative of Icahn’s interests. Traton Chief Executive Andreas Renschler and the German truck maker’s chief financial officer, Christian Schulz, also have seats on Navistar’s board."
That board, as Navistar noted in its statement, "in consultation with its financial and legal advisors, will carefully review and evaluate the proposal in the context of Navistar's strategic plan for the company in order to determine the course of action that it believes is in the best interest of the company and its stakeholders."
Jeff Kauffman, managing director for Loop Capital and a Navistar shareholder, told HDT in a statement that the Traton offer “feels light.”
“We reaffirm our Buy rating and $38 price target based on forward fundamentals,” Kaufman said in a market analysis his firm issued on the proposed deal. “We believe the unsolicited proposal by Traton SE to take over the remaining 83.2% of the company that it doesn't own is inadequate. Recall that during Navistar's analyst day last fall, implied management targets to 2024 suggest a $120+ share price over the next five years. Clearly the cycle will be near a low point for the next 12-18 months, and coming in with a bid to acquire the shares makes sense – however, our current sum-of-parts valuation for Navistar yields $51.”