Could COVID-19 ruin Traton’s bid for Navistar?

Cash is king for manufacturers bracing for the full impact of the coronavirus, raising questions for Traton about its all-cash bid for Navistar. By Martin Kahl

Fleets may be experiencing an unplanned uptick in business as a result of increased consumer demand for essential supplies and groceries, but the novel coronavirus (COVID-19) has hit the manufacturing end of the truck industry hard.

Strategy update: Navistar – 2020 edition

Already bracing for a difficult year thanks to a long-anticipated cyclical downturn, truck manufacturers are now factoring in the impact of a host of other challenges, not least the suspension of production in response to the COVID-19 pandemic.

Although transportation equipment manufacturing is one of the industries listed by the US Department of Homeland Security as a ‘critical manufacturing sector’, most truck manufacturers in the US have halted operations. Daimler Trucks North America (DTNA) has suspended production in the US and Mexico, Paccar has halted all truck production globally, most Volvo Group production lines have come to a temporary stop, and Navistar has suspended production for two weeks at its Springfield, Ohio truck assembly plant.

Navistar being taken over has seemed a long-term inevitability, and Traton being the acquirer has been the medium-term expectation since the two formed an alliance in 2016

Navistar also said it would withdraw its previously announced financial and industry guidance for its financial year, which ends on 31 October 2020. The company—which had earlier repeated its full-year financial guidance, subject to potential operational impact from the coronavirus—enjoyed a strong previous fiscal year. Sales were up 26% to 106,500 vehicles in the 12 months to 31 October 2019, when the company was profitable for a third successive year.

Just weeks ago, the Lisle, Illinois-headquartered truck and bus manufacturer began considering a US$2.9bn cash takeover bid from VW’s Traton that saw Navistar’s share price surge by over 50%. The former VW Truck & Bus group, which also owns MAN and Scania, controls a 16.8% stake in Navistar following a strategic alliance struck in 2016. That alliance also laid the groundwork for joint purchasing and collaboration on propulsion technology. Existing synergies and further anticipated savings indicate a successful partnership—so successful, in fact, that it was only a matter of time before Traton would launch a takeover bid that would give it a vital reach into the highly profitable North American truck market.

How both companies emerge from the current economic turmoil will ultimately shape the future of their relationship

“Navistar being taken over has seemed a long-term inevitability, and Traton being the acquirer has been the medium-term expectation since the two formed an alliance in 2016,” notes Jonathan Storey, author of a new Automotive World report on Navistar’s strategic outlook. In a statement, Navistar acknowledged receipt of “an unsolicited proposal from Traton SE regarding a potential transaction to acquire the company for $35 per share in cash.” Delivered to Traton at the end of January, weeks before the coronavirus reached pandemic status, the seemingly inexorable bid has been interrupted by the previously unimaginable COVID-19 pandemic.

“From this point there look to be only two likely outcomes,” continues Storey. “Either Traton decides to conserve resources and withdraws its offer for the 83% of Navistar’s equity it doesn’t already own, or Traton takes advantage of the current market disruption to increase its stake while the stock is trading some 53% below Traton’s January 2020 offer price of US$35 per share.”

Storey suggests the latter course of action is the most likely, noting that, “While some of Navistar’s activist shareholders would not be willing sellers in the current market trough, Traton at least has the chance to lower the average price per share.”

It was only a matter of time before Traton would launch a takeover bid that would give it a vital reach into the highly profitable North American truck market

Those activist shareholders include Carl Icahn, Navistar’s largest shareholder, with 16.9% of the company, and Mark Rachesky’s MHR Fund Management, which controls a 16% stake. Both have Navistar board representation; so too does Traton Chief Executive Andreas Renschler. In response to Traton’s bid, the board advised shareholders in its statement that “it will carefully review and evaluate the proposal in the context of Navistar’s strategic plan.”

Volkswagen Group’s Chief Financial Officer Frank Witter is reported to have said the company would not pursue a takeover at any cost, and like all automakers, VW will need to prioritise liquidity following its near-global production shutdown in response to the coronavirus. Volkswagen Group Chief Executive Herbert Diess made it clear that the company “will watch like hawks the liquidity situation and the prioritisation of all activities we are contemplating.”

How both companies emerge from the current economic turmoil—challenged on a number of fronts by tumbling oil prices, stock market volatility, suspended vehicle production, a cyclical downturn and an inevitable recession—will ultimately shape the future of their relationship.

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