Four years ago, many believed Navistar was headed towards an almost certain bankruptcy.
The truck maker had squandered billions on a diesel engine that didn’t win the approval of the Environmental Protection Agency, in a move insiders likened to “betting on the diesel version of Betamax when the rest of the world is going to VHS.” One of Navistar’s top shareholders, Carl Icahn, would often refer to then-CEO Daniel Ustian as a “crazy uncle” working on a failed multi-billion dollar pet project in his garage.
But Navistar didn’t fold and now there are concrete signs that the Lisle, Illinois-based company is going from the brink of bankruptcy to more stable footing.
On Tuesday morning, Volkswagen Truck & Bus said it would buy a 16.6% stake in Navistar at a cost of $15.76 a share, a $256 million injection the company can use to manage its $5 billion debt load.
Volkswagen’s stock buy creates new liquidity for Navistar, but more importantly it serves as a major vote of confidence. The German automotive giant’s purchase comes with a joint procurement agreement that could reshape Navistar’s supply chain, freeing up hundreds of millions of dollars in cost savings to give the ailing truck-maker newfound operational breathing room.
The procurement JV will put Navistar into Volkswagen’s truck parts buying network, which also includes big brands like Scania , Man & Onibus. It will also give Navistar and Volkswagen increased buying heft as they invest in new powertrain technologies, and in-vehicle technologies such as advanced driver assistance systems, connected vehicle solutions, autonomous driving, electric vehicles, cabs and chassis.
Navistar expects the procurement JV will generate half a billion dollars of synergies over the next five years, $200 million in annual cost savings by 2021 and even more afterwards.
“This alliance will benefit our purchasing operations through global scope and scale. Over the longer term, it is intended to expand the technology options we are able to offer our customers by leveraging the best of both companies and enabling Navistar to deliver enhanced uptime,” Navistar CEO Troy Clarke said in a press release. “Volkswagen Truck & Bus’s equity investment will strengthen our liquidity position and expand our financial flexibility, while aligning us with a valuable strategic partner,” Clarke added.
Navistar surged as much as 62% in early Tuesday trading to $22.82. The company’s stock, which hit a low of $6 a share in early 2016, has gained over 160% year-to-date as investors grow confident a bankruptcy is not imminent.
“Navistar has come a long way since its collapse in 2012 when it finally abandoned its colossally failed proprietary emissions system,” said Vicki Bryan, a senior analyst at Gimmie Credit. Bryan sees the VW pact as a third positive development for Navistar in the past year after won its first major military contract last September and signed a commercial van partnership with General Motors GM -0.40% in June.
Volkswagen’s share purchase gives the automotive giant the ability to nominate two directors to Navistar’s board and comes with a three year lock-up on selling shares. A decade ago, analysts speculated Volkswagen would look to buy Navistar and analysts at CreditSights see Tuesday’s pact as a possible first step to an eventual merger.
“Navistar’s partnership with a well-capitalized strategic leader such as VW with hopes of a full buyout later presents a better alternative for both equity and credit holders versus restructuring or waiting for a cyclical recovery,” Brian Studioso and Hitin Anand, analysts at CreditSights, wrote in a note Tuesday.
For Volkswagen, Tuesday’s Navistar deal is being taken as evidence of a commitment to expand into heavy trucking in North America, where it presently has little footprint. “VW’s 2014 acquisition of Scania and majority stake in MAN provided it with relevant heavy-duty truck technology, but no meaningful presence in North America. Navistar could fill that gap,” Citigroup analyst Mike Tyndall said in a client note.
“We are now taking the next step on our way to becoming a Global Champion in the commercial vehicles industry. The strategic alliance with Navistar is an important milestone and will be very beneficial for both sides,” Andreas Renschler, CEO of Volkswagen Truck & Bus, said in a statement.
J.P. Morgan is acting as financial advisor to Navistar and Sullivan & Cromwell is acting as legal advisor.