A leading US business writer has said that Navistar should take the money Traton has offered for it without delay, or risk being consigned to history.
Crane Business writer Joe Cahill says that after years of futility, Navistar is on the verge of getting the money and muscle it has needed since emerging from the breakup of International Harvester more than three decades ago and that all it has to do is accept the Traton buy out.
Cahill’s comment comes after Traton offered $US35 per share for the 83 percent of Navistar it doesn’t already own.
Navistar said it promised to “carefully review and evaluate the proposal in the context of Navistar’s strategic plan for the company in order to determine the course of action that it believes is in the best interest of the company and its stakeholders.”
Cahill says that “Traton’s offer is the best—and possibly the last—chance to put Navistar on firm financial footing and provide its shareholders with a return on their investment in a company that has struggled to compete with larger rivals and generate consistent profits since selling off the International Harvester agricultural business to focus on making trucks and truck engines back in 1985”.
“Navistar’s story over those years has been a tale of persistent losses, periodic missteps and consistent competitive setbacks. Undersized in a notoriously cyclical industry dominated by giants like Germany’s Daimler and America’s Paccar.
Navistar lost money in 10 of the last 20 years and last year, it reported net profit of $US221 million on $11 billion in revenue, down 35 per cent from a $US340 million profit in 2018 on $US10 billion in sales.
To keep afloat, Navistar resorted to restructurings and plant closings that vaporised thousands of jobs. A new round of layoffs will reduce headcount to about 12,000, down 42 per cent from more than 20,000 in 2011.
Cahill says that investors suffered alongside workers, as Navistar shares have lost 60 per cent of their value since 1986. During the same period, the S&P 500 climbed 1,455 percent and rival Paccar saw its stock soar 3,206 per cent.
Navistar’s woes included some self-inflicted wounds, writes Cahill, including accounting errors which forced the company to restate financials and caused a brief delisting of Navistar stock. The U.S. government has joined a lawsuit against Navistar, accusing its military equipment unit of overcharging the Pentagon. Navistar has defended its pricing as “fair, reasonable and competitive.”
Cahill says that by far the worst blunder was Navistar’s decision to develop a new engine using unproven new technology. “The engine not only failed to meet new environmental protection standards, but tended to fail and it triggered hundreds of millions in warranty claims and lawsuits, while shattering Navistar’s reputation with customers,” Cahill said.
At the same time, a weak balance sheet showing a shareholder’s deficit of $US3.7 billion will make it harder to ride out the next industry downturn, which appears to be getting underway.
Navistar’s lack of cash will affect its ability to keep pace with technological changes reshaping the trucking industry. The company needs to make big investments in electric powertrains and automated driving systems. The company has been lagging in electrification and fuel cell technology and will need the backing of a larger entity.
Cahill says a Traton buyout would make all these challenges more manageable. Customers likely would be more willing to consider Navistar’s new engine if it has the full backing of Traton. Combining Navistar’s annual production volume of 100,000 vehicles with Traton’s 230,000 would create an entity with greater heft to compete with industry leader Daimler, which builds close to 500,000 trucks a year.
Financially, a tie up with Traton would not only provide ballast for navigating cyclical fluctuations, but also give Navistar access to deeper budgets for investment in new technologies.
As for the impact of a buyout on Navistar’s workforce, Cahill says there’s no denying that some jobs likely would be lost, but that the wholesale layoffs associated with many mergers seem unlikely.
“Traton sees Navistar as its entrée to the North American market, where it has no significant operations. It would need Navistar factories and workers to enable its expansion into the USA, so employees’ long-term prospects may be brighter under Traton than an independent Navistar that’s in perpetual cost-cutting mode.
While the business logic of combining appears strong, price remains an issue according to Cahill.
Traton has offered a premium of 45 per cent to Navistar’s stock market price before the bid was announced, but the offer values Navistar at 7.3 times its projected 2020 earnings before interest, taxes, depreciation and amortization, well below the 8-plus multiples of competitors Paccar, Volvo and Cummins.
Corporate raider Carl Icahn and onetime protege Mark Rachesky hold a combined 33 per cent of Navistar stock, and they may push for more money and force Traton into paying more. Navistar also has some negotiating leverage, because realistically it offers Traton its only plausible opportunity to become established as a significant player in North America in a reasonable time frame. By the same token no competing bidder has emerged to push up the price.
Cahill concludes that Navistar directors should leave no money on the table.
“But they should also be realistic about the company’s value. Navistar is lucky to be getting any buyout offer, let alone a premium bid when the industry is heading into a slump and if Traton walks away, Navistar’s future looks a lot like its past…. bleak!”
