LONDON (Reuters Breakingviews) - So much for amicable partnership. Volkswagen’s truck division Traton has made a long-awaited but unsolicited bid to take full control of U.S. rival Navistar International. The premium looks underpowered compared with the benefits of an alliance. Falling industry volumes may leave the American company, and shareholder Carl Icahn, with few attractive alternatives.
Traton Chief Executive Andreas Renschler has changed his tune. Barely six months have passed since he told German newspaper Handelsblatt he had no interest in taking over Navistar, saying that the company’s existing 16.8% stake plus two board seats were sufficient. On Thursday the $13 billion company, which Volkswagen listed in Frankfurt last summer, offered $2.9 billion for the 87% of Navistar it doesn’t own.
It makes sense for the maker of Scania and MAN commercial vehicles to execute a strategic U-turn. Traton’s roughly 13% share of the North American market lags domestic rival Daimler and is about half what it achieves in Europe and South America. Faced with a generally gloomy outlook for the automotive business – Fitch analysts forecast zero global sales growth over the next two years – it makes sense for Volkswagen to bulk up and cut costs. American trucks are facing particular difficulties. Navistar projects that industry volumes will decline by a quarter this year before recovering.
Traton hasn’t spelled out the benefits of a combination. But last September Navistar said the alliance would produce around $200 million in annual synergies by 2024, due to the companies’ combined purchasing power, global scale and technology pooling. Taxed at Traton’s 27% rate and capitalised, those could be worth nearly $1.5 billion, according to Breakingviews calculations.
That makes Traton’s offer of a 19% premium to Navistar’s volume-weighted average share price over the past 90 days – worth around $500 million – look downright mean. True, Renschler could argue investors have already priced in a portion of those synergies, which were on offer without a full takeover. But the fact that Navistar shares have fallen by 18% since it spelled out the benefits of the alliance suggests shareholders are sceptical.
Rather than rejecting the offer outright, Navistar said it would review the offer. Its shares jumped above the $35 offer price in after-hours trading on Thursday. Icahn is unlikely to give up easily. Despite Navistar’s tough market, Volkswagen can afford to rev up its bid a little.
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