Navistar Turns Target After Poison Pill Adopted: Real M&A

Icahn Enterprises Holdings LP. CEO Carl Icahn
Carl Icahn, billionaire investor and chairman of Icahn Enterprises Holdings LP. Photographer: Scott Eells/Bloomberg

Navistar International Corp. is turning into the cheapest takeover target in the world among commercial truckmakers as billionaire Carl Icahn and his former protege push the company to boost its valuation.

Icahn increased his stake to 11.9 percent this month and hedge fund manager Mark Rachesky disclosed he had taken an even bigger position as Navistar slumped to a three-year low, prompting the company to adopt a poison pill to help fend off hostile bids. Even after rebounding 9.7 percent, the $1.81 billion company trades at an 87 percent discount to its sales, the least expensive among commercial truckmakers with market values higher than $1 billion, according to data compiled by Bloomberg.

Rachesky’s MHR Fund Management LLC, which controls a 13.6 percent Navistar stake, said it may seek talks with management after the company lost money for a second straight quarter, slashed its forecast and shuffled top executives as it struggles to meet federal emission standards for a new truck engine. While analysts project Lisle, Illinois-based Navistar will post its first annual loss in five years, Barrington Research Associates Inc. said it could attract suitors such as Fiat Industrial SpA and Volkswagen AG as they seek to expand in North America.

“There are a lot of companies around the world who want a global presence,” David Leiker, a Milwaukee-based analyst with Robert W. Baird & Co., said in a telephone interview. “And the only way you can do it is Navistar. You have a company that’s gone down a path that’s proving more challenging than expected that’s having a significant impact on their shareholders.”

Icahn Stake

Dan Ustian, Navistar’s chairman and chief executive officer, declined to say whether the company has been approached by suitors or would consider a sale, said Karen Denning, a spokeswoman for Navistar.

Navistar, which traces its roots to the invention of the first mechanical reaper in 1831, makes commercial and military trucks as well as buses, engines and parts. The company had revenue of $14.2 billion in the 12 months through April, with the majority coming from truck sales in the U.S. and Canada, according to data compiled by Bloomberg.

Icahn first disclosed a position in Navistar in October. The stock had dropped more than 50 percent in less than six months when the trucking industry failed to rebound as much as analysts had projected. Icahn said he bought the stock because it was undervalued, and that he had talked with management, according to a filing at the time.

Since then, Navistar reported a second-quarter loss on June 7 and lowered its profit forecast for the fiscal year ending in October because of costs for a new engine with emission-reduction technology that has yet to gain certification from regulators. Icahn increased his stake as the results reduced the company’s shares to $24.11, the lowest since March 2009.

Poison Pill

Rachesky, Icahn’s former chief investment officer, disclosed last week that he also had taken a stake in Navistar and “may seek to engage in discussions with management,” according to a filing. Rachesky was on the opposite side of Icahn when his mentor unsuccessfully sought control of Lions Gate Entertainment Corp. two years ago.

A telephone message for Icahn wasn’t returned. Joele Frank, a spokeswoman for Rachesky, said he declined to comment.

The investors’ disclosures spurred an 18 percent rebound in the shares and led Navistar’s board yesterday to adopt a poison pill to prevent “coercive takeover tactics.”

“The board recognizes that they’ve got some activist shareholders in the stock and they may be forced to put the company up for sale,” Walter Liptak, an analyst for Chicago-based Barrington Research, said in a telephone interview. “They want to make sure that they’re going to have some control over valuation.”

‘Value There’

Navistar closed at $26.45, valuing the company at 0.13 times sales, lower than the any other commercial truck and vehicle maker with a market capitalization exceeding $1 billion, according to data compiled by Bloomberg. The median multiple for the group was 0.71 times, the data show.

“There is value there” that could appeal to a potential buyer, Patrick Nolan, a Stuart, Florida-based analyst for Penn Capital Management Co., said in a telephone interview. Penn Capital oversees $6.5 billion and no longer owns Navistar. “It’s a high-quality company with a management issue.”

The decision to lower emissions using a different technology from the rest of the industry puts the blame on Ustian, Nolan said.

Today, the shares fell 6.8 percent at the close in New York.

Market Share

Navistar could attract Fiat Industrial, the truck and tractor manufacturer that carmaker Fiat SpA spun off in 2011, or Volkswagen as they seek to gain a larger share of the North American truck market, Barrington’s Liptak wrote in a June 12 note. The company could fetch a price of $50 to $60 a share in a takeover, according to the note.

Navistar, which has seen its market share for class 8 trucks in the U.S. and Canada fall by 29 percent since 2009, still sells one of every six heavy trucks in the U.S. and Canada, according to Polk, a research company based in Southfield, Michigan.

The company also has the top market share for severe service trucks, which include military vehicles, medium-duty trucks and school buses in the U.S. and Canada, Navistar said in a June 7 investor presentation.

“One of the more striking surprises is that Navistar has held the market share it has,” Brian Sponheimer, an analyst at Gabelli & Co. in Rye, New York, said in a phone interview. “It speaks to the quality of the truck they make and the price point, which is below a lot of the competition. It’s a value brand and it appeals to fleet buyers.”

Taking Time

Gabelli is a unit of Gamco Investors Inc., which oversees about $35 billion including 4.3 million shares of Navistar.

While Navistar is a logical takeover target for Volkswagen or Fiat Industrial, a transaction probably won’t happen until the company wins U.S. Environmental Protection Agency certification for its 13-liter engine and the potential buyers integrate other recent acquisitions, said Sponheimer and Baird’s Leiker. Once those issues are resolved, which Sponheimer estimated may take a year, Navistar could fetch as much as $64 a share, he said.

Volkswagen raised its stake in MAN SE June 5, taking a step toward acquiring greater control of the German truckmaker. Volkswagen, which acquired a controlling stake in Scania AB last year, wants to forge an alliance between Scania, MAN and its own commercial-vehicles unit.

Marco Dalan, a Volkswagen spokesman in Wolfsburg, Germany, declined to comment on whether the company is interested in Navistar.

Fiat Plans

Fiat Industrial wants to expand its truck business in the U.S., potentially by acquisition, Chairman Sergio Marchionne told reporters June 8. He didn’t say which companies he was considering targeting. Fiat Industrial’s commercial-vehicle brands include Iveco, Case and New Holland.

A Fiat Industrial official, who asked not to be named citing company policy, declined to comment beyond Marchionne’s comments.

A potential buyer may hold off on approaching Navistar until the company either receives EPA certification for its engine or lays out another strategy for meeting the emission standards, Penn Capital’s Nolan said. An acquisition is further complicated by Navistar’s $3.2 billion in pension and retiree health-care obligations, he said.

U.S. authorities may block a takeover of Navistar by a foreign buyer unless the company’s defense unit is split off first, a further impediment to a sale, Nolan said.

Bearish Bets

The unit, which sells vehicles to the U.S. Defense Department as well as militaries in Iraq, Afghanistan and Singapore, generated 13 percent of revenue last year.

Short sellers have become increasingly bearish, indicating they don’t foresee a takeover. In a short sale, traders sell borrowed stock on the assumption the price will drop, enabling them to profit by buying it back at a lower price.

About 8.7 percent of Navistar’s outstanding shares were sold short as of June 15, the highest on record for the company, according to New York-based research firm Data Explorers.

Given the potential roadblocks to a sale, Icahn and Rachesky may decide to focus their efforts on improving the company’s management and operations as a standalone company rather than seek a buyer for Navistar as way of boosting the shares, said Kristine Kubacki, a St. Louis-based analyst at Avondale Partners LLC.

Available Options

“From a takeover-target perspective, I don’t know how much the activists can do,” Kubacki said in a phone interview. “I don’t think it’s as clear cut as other acquisitions we have seen in the space. The best path they could go after is turning the franchise around and harvesting the individual opportunity that the business offers.”

Still, any changes that may help improve Navistar’s strategy and performance could eventually make the company attractive to a buyer, said Andrew Davis, an analyst for Baltimore-based T. Rowe Price Group Inc.

“Generally, when activists get involved with companies like these, they’ll look at pretty much every available option,” Davis said in a phone interview.

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