• KCL M&A Society

Volkswagen’s Traton Purchase the Remaining Stake of Navistar for $3.7 billion


By Abhinav Vitta, Head of Industrials at the KCL Mergers & Acquisitions Society


Deal Introduction


Acquirer: Traton SE

Target: Navistar International Corp

Date of Announcement: 16/10/2020

Acquirer Advisors: N/A

Target Advisors: JP Morgan and PJT Partners. Sullivan & Cromwell is providing legal counsel


Volkswagen’s subsidiary, Traton, has agreed to purchase the remaining shares in Navistar at a price of $44.50 per share. The deal comes following an initial offer of $35 per share in January 2020 and gives Traton an invaluable position in the lucrative American truck market. It has been an ambition of VW CEO Herbert Diess to restructure the company’s truck unit and position the business to take on Daimler and Volvo.


Traton owns 16.8% of Navistar, narrowly second to Carl Icahn. The transaction is expected to close in mid-2021 but is still subject to Navistar shareholder approval. The major shareholders in Navistar are Icahn Capital and MHR Fund Management who have already indicated their willingness to support the transaction.


Volkswagen will be providing a 12-18month loan of approximately €3.3B to fund the transaction.


Traton SE

(https://traton.com/en/newsroom/press_releases/q3-2018.html)


Founded: June 6, 2013 – formerly known as Volkswagen Truck & Bus GmbH

CEO: Matthias Gründler

HQ: Munich, Germany

Ticker: 8TRA

Share Price at the time of writing: €22.36

Market Cap at the time of writing: €11.243B


Financial data

EV: €19.58B

LTM Revenue: €20.61B

LTM EBITDA: €2.837B

LTM EV/Revenue: 0.95x

LTM EV/EBITDA: 6.9x


The Traton Group encompasses the MAN, SCANIA, Volkswagen Caminhões e Ônibus, and Rio brands. The company currently operates in 17 countries with 83,000 employees. The firm celebrated its IPO on the 28th of June 2019.


The most important markets for the Traton Group are the EU27+3 region, Brazil, South Africa, Russia, and Turkey. The COVID-19 pandemic has impacted all of Traton’s markets with truck and bus registrations down substantially. However, according to the company’s most recent quarterly report, there is a noticeable recovery in the majority of Traton’s core markets.


Traton has outlined a four key pillar plan strategy known as Global Champion: i. Brand performance ii. Cooperation & synergies iii. Global expansion and iv. Customer-focused expansion. By implementing such a strategy, Traton aims to achieve a 9.0% return on sales(1).

(https://ir.traton.com/download/companies/traton/Annual%20Reports/DE000TRAT0N7-JA-2019-EQ-E-00.pdf)


Navistar International Corp.

(https://www.prnewswire.com/news-releases/navistar-financial-closes-300-million-wholesale-funding-transaction-300340271.html)


Founded: 1986 – formerly known as International Harvester Company founded in 1902

CEO: Persio Lisboa

HQ: Lisle, Illinois, USA

Ticker: NAV

Share Price at the time of writing: $44.15

Market Cap at the time of writing: $4.397B


Financial data

EV: $8.3B

LTM Revenue: $8.22B

LTM EBITDA: $492M

LTM EV/Revenue: 1.01x

LTM EV/EBITDA: 16.86x


In 1902, the International Harvester Company was formed to produce agricultural equipment. In 1986, the company sold its agricultural business and focused on producing commercial trucks and engines. It was renamed Navistar International Corp.


Now, Navistar is a leading manufacturer of commercial trucks, buses, and engines. The firm operates in 4 primary countries: the USA, Canada, Mexico, and Brazil, and its core business remains in the US and Canada. 1 in 6 class 6-8 size trucks is a Navistar truck in these markets and nearly half of the school buses are produced by Navistar(2). The company also provides financial services for customers.


The firm’s mission is to provide best-in-class uptime (the time in which a machine is in operation) to keep drivers on the road. “It’s about taking safety, performance, and driver comfort to a whole new level”(3).


The company announced Navistar 4.0 in September 2019 – a four-year plan to grow EBITDA margins. The plan involves significant investment to expand manufacturing facilities in Alabama and Texas. Moreover, the company has formed alliances with Love’s Travel Stops for truck servicing and Traton to produce powertrains. The strategy remains in focus despite the COVID-19 pandemic.


Both companies have evidently been hurt by the COVID-19 pandemic and the uncertainty surrounding it reflected by poor financial performance. The pandemic has forced, like many businesses around the world, to reduce costs. Navistar has considered pursuing outsourcing opportunities, flattening the organisational structure and reducing supplier expenses, and much more. Traton has made cuts in subcontracted work, personnel costs, postponing projects and events, and closed production plants worldwide.

Deal motivation

Expansion to the American Market

Achieving a presence in new markets is a common motivation for companies pursuing cross-border transactions. Traton’s acquisition of Navistar is very much part of the firm’s ‘Global Champion Strategy’. Pillar 3 of the strategy is ‘Global Expansion’ and refers to leveraging scale from a global footprint. As outlined above, Traton currently has no direct access to the North American market which is regarded as the source of the industry’s largest stream of profits. Traton has been looking for ways to gain market share from their main competitors Daimler and Volvo (who also control Mack Trucks and Renault Trucks). By completing the acquisition, Traton will not have to face the difficulty of breaking into a relatively consolidated market and can instead benefit from everything that comes with the brand’s recognition and resources.


Other than Asia-Pacific, the North American region is thought to be one of the fastest-growing markets over the next five years. The market is expected to grow at a rate of 14%(4). The rapid growth is expected as a result of increased construction, mining, and logistic activities. These are all activities that would increase in an economic 'boom' cycle. Hence, the speed at which these activities can recover will depend on the rate at which the world is able to roll out the COVID-19 vaccine and return to ‘normal life’.

Cost Reductions

In January 2020, Traton offered Navistar $35 per share valuing the remaining shares at $2.9 billion. However, Navistar suggested that the offer “significantly undervalues” the company due to the potential for synergies. If Traton were able to cut costs equal to 6% of Navistar’s sales (similar to what was achieved in other deals), it could generate savings of $672 million annually(5).


Research and Development

Traton and Navistar have been jointly working on driverless technology. However, perhaps more importantly, one of the major trends taking over the trucking sector is the alternative propulsion vehicle. The prominence of Tesla and Nikola Motors has drawn significant attention to electric and fuel cell power trucks leaving incumbents scrambling over developing their own technology. The new firm will be able to coordinate R&D plans.


Traton Group has begun investing in what they call ‘ACE trends’(6) (autonomous, connected, electrified) and they have suggested that their budget will increasingly be diverted to this operation. Hence, any of the intellectual property (IP) gained from prior investment can be shared with Navistar to benefit their trucks while also ensuring that capital is not wasted on IP that has already been discovered.


Scale Benefits

The truck market is a consolidated market. Many of the major players in the industry own other brands as subsidiaries. The implication is that Traton’s competitors are able to exploit considerable economies of scale reducing the cost per unit of production, which are more important in industries facing high fixed costs. Cost reductions can come in the form of falling procurement cost and refinement of the managerial structure. Economies of scale become crucial in determining the profitability of firms and competitiveness.


As Traton acquire Navistar, they are simultaneously increasing their balance sheet size giving rise to financial economies of scale. The acquisition may then improve the credit rating of Navistar, reducing borrowing costs.


Moreover, the acquisition would produce the opportunity for cross-selling synergies. This is the idea of selling the same product that is currently being sold to a certain set of customers to another set e.g. trucks in the USA to those in Turkey or Russia. As there are markets where Navistar and Traton do not overlap, vehicles could be sold in these markets in an attempt to gather greater market share. Also, the combination of the two firms will provide a broad and complete range of vehicles suitable for various markets.


Potential risks/uncertainties


Integration Difficulty

One of the main challenges facing any merger or acquisition is the ability to integrate the companies together. Failure to combine companies effectively will reduce the business’ ability to exploit the benefits outlined above and therefore the probability of the merger creating value.


Traton has faced difficulty in the past in coordinating and unifying SCANIA and MAN which was complicated by internal rivalry. The result was a need for deep and time-consuming restructuring to bring the subsidiaries into a position that would allow them to develop joint projects and ultimately create value for shareholders.


However, Navistar and Traton have already been working in a strategic alliance successfully. The existing involvement has focused on getting parts to dealers faster, systems support and electric vehicles, and advancement in powertrain efficiency/technology. Additionally, Traton is an existing shareholder in Navistar. The experience will prove invaluable as it is likely to reduce the risk of difficulty in the transition.


COVID-19

The recovery following the COVID-19 pandemic and recession will be key to the growth prospects of Traton-Navistar. A prolonged period of low economic growth and limited activity in industrial activity will keep demand for trucks suppressed damaging the firm’s finances. If the new management team isn’t able to act quick enough, the added burden of duplicated costs (e.g. having two sets of sales teams or two supply chains where one would suffice) will act as a drag on the business and can potentially have serious impacts on the future of the business. While interest rates remain low, Traton will still have to face the interest payments on the loan being used to finance the acquisition.


However, it can also be thought that the pandemic will give the newly combined firm a chance to restructure the business. Firms can face significant opposition when trying to implement cost-saving measures such as reducing personnel in businesses following a merger. The pandemic can act as a justification (recessions are often thought to have a ‘cleansing effect’ on the economy reallocating capital and resources to the most efficient sectors of the economy) to refine operations and reposition the business in such a way to capitalize on the upturn/boom.


Competitors

Traton Group will be facing increased competition from new entrants in the industry. The alternative propulsion trucking market, which is thought to be the future of the industry, is hotly contested with Tesla and Nikola Motors. The future success of Traton and Navistar will depend on how well they are able to adapt to the challenge that these competitors pose and on how quickly they are able to generate their own proprietary technology.


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Bibliography

1. Traton Group Annual report: https://ir.traton.com/download/companies/traton/Annual%20Reports/DE000TRAT0N7-JA-2019-EQ-E-00.pdf p.92.


2. Data from Navistar Factbook: https://s2.q4cdn.com/760048324/files/doc_presentations/Factbook/2020-Factbook-Aug-update.pdf


3. Data from Navistar Factbook – same link above


4. https://www.businesswire.com/news/home/20200414005968/en/Insights-into-the-Truck-Market-in-North-America-to-2025---Competitive-Developments-Such-as-Expansions-New-Product-Launches-and-Mergers-Acquisitions---ResearchAndMarkets.com


5. Analysis found at: https://lipperalpha.refinitiv.com/2020/09/breakingviews-icahn-cant-push-vw-too-much-on-navistar-bid/


6. https://ir.traton.com/download/companies/traton/Annual%20Reports/DE000TRAT0N7-JA-2019-EQ-E-00.pdf on p.41



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