September 18, 2020

Breakingviews: Icahn can’t push VW too much on Navistar bid

by Breakingviews.

Trust Carl Icahn to play hardball. Truck maker Navistar International, in which the hard-nosed activist holds a 17% stake, is pushing Volkswagen-owned Traton to up its $4.3 billion bid. VW boss Herbert Diess can afford to raise the price. But falling sales and the need to invest in electric vehicles mean shares could tumble if the Germans don’t play ball.

Navistar has gamely invited Traton, which already holds 17% of its U.S. target, to conduct due diligence after the latter raised its cash bid first made in January by 23% to $43 per share. That’s a pretty stunning turnaround given a takeover was considered as good as dead during the dark days of April when Navistar shares plunged to under $16.

The Illinois-based company argues that the new offer still “significantly undervalues” the synergies from a union. It has a point. If VW can cut costs equal to 6% of Navistar’s 2019 sales, in line with similar deals, then it could yield savings of some $672 million annually. Add those to Navistar’s forecast 2021 operating profit of $423 million and VW can afford to increase its offer by around one half and still make a return that exceeds its 9% probable cost of capital, according to a Breakingviews calculation which uses a tax rate of 28%.

There are other good reasons to suppose Diess may bend to Icahn’s demands. Firstly, VW has few other options to acquire a chunk of the North American market in which Navistar holds a roughly 13% share. And a deal could make the company second by global truck production – behind domestic rival Daimler.

Still, Navistar doesn’t come hassle-free. The company reported a $111 million loss in the first nine months of its fiscal year due to a plague-induced sales slump, with industry volumes not expected to recover until at least 2022. Navistar needs not only VW’s expertise, but also its bigger balance sheet, to invest in electric trucks when rivals such as General Motors have partnered up with low emissions specialist Nikola. If Diess walks then Navistar’s enterprise value – currently 9 times estimated 2022 earnings before interest, tax and depreciation, compared to a long-term average of 7.5 times according to Jefferies – will probably plunge.

Icahn can still push Navistar, but haggling has its limits.


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