The market is abuzz with what might come next for Navistar after the company missed earnings estimates for the first two quarters of this year. For its latest quarter, the company reported a loss of US$172m, or US$2.50 a diluted share. This included several charges for items such as warranties, asset impairments, and non-conformance penalties, but, even excluding these, the net loss was still US$137m, or US$1.99 a share.
This was followed by the DC Court of Appeals ruling against an interim Environmental Protection Agency (EPA) rule that allowed Navistar to sell non-compliant engines providing it paid a fine of about US$1,900 per engine. As reported by dealReporter, the EPA will face an uphill battle if it chooses to challenge the opinion.
Along with Volkswagen, Fiat Industrial is one of the names being talked about as a potential bidder for Navistar, and at this point in time, it appears to be in a stronger position than VW to make such a bid.
Along with Volkswagen, Fiat Industrial is one of the names being talked about as a potential bidder for Navistar, and at this point in time, it appears to be in a stronger position than VW to make such a bid. Indeed, the combination appears to produce greater synergies than if Volkswagen chooses to enter the fray, with Navistar and Fiat Industrial having more product overlap. For instance, Fiat’s Powertrain product line is in direct competition with Navistar’s engines for light, medium and heavy trucks in South America.
Nonetheless, no such deal is imminent, and recent comments by Fiat Industrial’s Chief Executive, Alfredo Altavilla, were intended to end speculation. Furthermore, any such deal would likely be delayed since Fiat appears to have its hands full integrating CNH Global after it acquires the remaining 12% it does not currently own. However, once CNH is comfortably in the fold, there will be an increased rationale for pursuing Navistar. CNH manufactures agricultural and construction equipment that indirectly competes with Navistar’s agricultural engine products.
Volkswagen does not stand to gain the same benefits by acquiring Navistar. Although it has the financial wherewithal to make the deal, the companies do not compete in the same markets, with Volkswagen lacking a major US truck market presence. Therefore, a deal would be more for product diversification in North America, which does not provide the same synergies. Cost savings from duplicative functions would be less significant than for a direct competitor, as would economies of scale.
The sense of excitement around Navistar is partly fuelled by the involvement of activist investors. Carl Icahn and Mario Gabelli have both upped their stakes in the company to 11.6% and 6.2%, respectively, after its results were announced. The following week, Mark Rachesky acquired a 13.6% stake, which he had begun accumulating in late May.
Investors should stay tuned: there will certainly be plenty of twists and turns in this ongoing saga.
Last year, Icahn proposed merging Navistar with Oshkosh, but he was unable to get his slate of directors elected to the latter’s board. Rachesky, an opportunistic investor who tends to be more patient than his protege, may not necessarily go along with Icahn’s plans. The two locked horns when Icahn attempted to take control of Lions Gate Entertainment. In 2010, Icahn’s attempt to take control of the movie studio was thwarted by Rachesky.
On 20 June, Navistar announced its board of directors had adopted a stockholder rights plan, designed to “deter coercive takeover tactics”, according to the company’s press release.
Investors should stay tuned: there will certainly be plenty of twists and turns in this ongoing saga.
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd
Larry Rothman, CFA, is associate editor at dealReporter, a division of Mergermarket. He covers convertible securities. This includes corporate transactions such as M&A and special situations.
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