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Daimler, Rolls-Royce Make 3.2 Billion-Euro Bid for Tognum

Daimler, Rolls-Royce Make 3.2 Billion-Euro Bid for Tognum
A Tognum AG employee assembles a series 4000 diesel engine at the Tognum AG plant in Friedrichshafen. Source: Tognum AG via Bloomberg

Daimler AG and Rolls-Royce Group Plc made a takeover bid for Tognum AG valuing the German manufacturer at 3.2 billion euros ($4.4 billion) as they target growing demand for heavy engines in emerging economies.

The stock closed 3.8 percent above the offer price of 24 euros per share after Friedrichshafen-based Tognum said the companies haven’t reached agreement on price. The offer is 30 percent above the March 4 close, the last trading day before the companies publicly expressed their interest.

Gaining control of Tognum, which Daimler used to own, would give the two companies the world’s second-largest maker of high-speed diesel engines for the marine, energy and defense industries after Caterpillar Inc. The deal would represent Daimler’s biggest purchase since buying a 34 percent stake in Mitsubishi Motors Corp. in 2000, according to Bloomberg data.

“We are looking for a higher price,” said Delta Lloyd Asset Management fund manager Edwin Slaghekke. “Tognum has a huge strategic value. It invested a lot in research and development, and in two-to-three years will have a larger competitive advantage.” Delta Lloyd owns 1.4 percent of Tognum.

The bid is conditional on more than 50 percent of the shares being tendered. Daimler Chief Executive Officer Dieter Zetsche said he was “optimistic” of reaching that target, even as investors lobbied for more money. German bank WestLB AG said it expected the bid to be raised to about 27.50 euros.

Shares Advance

Tognum closed up 1.69 euros, or 7.3 percent, to 24.90 euros, valuing the company at 3.27 billion euros. Daimler added 1.2 percent to 49.82 euros, while Rolls-Royce shares gained 3.2 percent to 619.5 pence in London.

Tognum welcomed the potential cooperation with Daimler and Rolls-Royce, even with a deal on price outstanding. The companies agreed not to cut jobs, maintain investment levels and retain existing facilities, including the headquarters in Friedrichshafen, Tognum said.

The offer is “highly attractive,” Daimler spokesman Florian Martens said by telephone when asked if the company would raise its bid. A Rolls-Royce spokesman declined to comment beyond today’s statement.

Daimler and Rolls-Royce are offering 16.5 times earnings before interest and taxes for Tognum. Acquirers paid a median of 13.25 times Ebit for assets in the auto- and truck-parts industry in the past five years, according to Bloomberg data.

“The offer represents a reasonable premium,” said Marc-Rene Tonn, an analyst with M.M. Warburg in Hamburg. “Given Daimler’s large cash reserve, it needed to pose the question about what to do with it. It’s an interesting expansion.”

Joint Venture

The two companies plan to form a joint venture to buy Tognum. Daimler will tender its 28.4 percent Tognum holding as part of the deal. Rolls-Royce will contribute its Bergen operation, which makes engines for ships and energy generation.

“By joining with Rolls-Royce, we can secure a distinctly larger piece of this expanding cake,” Zetsche said today on a conference call. Driven by developing economies’ need for energy generation and shipping, demand for off-highway diesel engines is likely to grow twice as fast as the global economy, he said.

Daimler, the world’s second-largest maker of luxury vehicles, has been piling up cash as demand for Mercedes-Benz cars soars. Cash from industrial units grew in 2010 by 4.7 billion euros to 11.9 billion euros. Daimler plans to use some of that cash to pay for the offer, which would cost the Stuttgart-based manufacturer at most 700 million euros, Chief Financial Officer Bodo Uebber said today.

Fitch Ratings said the acquisition would have no impact on Daimler and Rolls-Royce’s credit ratings.

Daimler Investments

Daimler has made a series of investments since exiting Chrysler in May 2007. The company bought stakes in Russian truckmaker OAO Kamaz and electric-car maker Tesla Motors Inc. It also swapped shares with Renault SA and Nissan Motor Co. to secure a small-car partnership, expanded its holding in fuel cell venture Automotive Fuel Cell Corp. and bought a Formula One racing team.

Tognum supplies heavy-duty diesel engines to power coast guard ships, tanks and generate electricity for offshore oil platforms. Combined with Rolls-Royce’s medium-speed gas and diesel engines, the company will target a market with sales potential of 30 billion euros, Daimler said.

The engine maker, which employs more than 8,700 people and will report 2010 results tomorrow, projects Ebit this year to be nearly 9 percent of revenue, which is forecast to be about 2.55 billion euros. Tognum projects sales growth in 2011 of about 10 percent, according to a presentation on its website.

Stake Purchase

Daimler, also the world’s biggest truckmaker, sold Tognum, then called MTU Friedrichshafen, for 1.6 billion euros to Stockholm-based private equity firm EQT Partners in March 2006 to help pay for job cuts, as it restructured Chrysler. After an initial public offering in July 2007, Daimler bought a 22 percent stake for 585 million euros in April 2008, increasing the holding to more than 25 percent three months later. Daimler in 2010 sold about 250 million euros in engines through Tognum.

Rolls-Royce sells Bergen engines through its marine unit to power ships and via its energy division to generate electricity. Rolls-Royce’s marine unit had 2010 sales of 2.59 billion pounds ($4.21 billion), or 25 percent of the company’s total. The unit earned 332 million pounds in operating profit last year. Rolls-Royce acquired Bergen when it bought Vickers Plc in 1999 for 576 million pounds.

Largest Acquisition

The acquisition may be Rolls-Royce’s largest, according to Sandy Morris, an analyst at Royal Bank of Scotland. The company has made only 15 purchases since 1998, according to data compiled by Bloomberg. The largest in that time was its Vickers purchase, which made Rolls-Royce the world’s biggest maker of marine propulsion equipment. It bought U.S. turboprop engine company Allison Engine Co. in 1995 for $525 million.

“This is a significant opportunity,” Rolls-Royce Chief Executive Officer John Rose said in a statement. “The complementary capabilities we are bringing together will provide us with a world leading proposition.”

Rose, who turned the company into the world’s second-biggest aircraft engine maker, retires at the end of the month. He will be succeeded by Royal Ahold NV CEO John Rishton. Rose has led the company for 14 years. Rishton is a former British Airways Plc chief financial officer.

Daimler was advised by Goldman Sachs Group Inc., Rolls-Royce by Banque Privee Edmond de Rothschild SA and Tognum by Berenberg Bank.

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