Industrials

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Volkswagen's $256 million investment is exactly what Navistar needed to put longstanding concerns about its financial viability to rest. 

The Lisle, Illinois-based company has spent the last few years reeling from its failure to obtain compliance with the Environment Protection Agency for its diesel engines and has lost substantial market share in heavy trucks as a result. Its shares bottomed in January at $6.23 apiece, down 91 percent from their high in 2011. And as Navistar burned through cash, its 8.25 percent coupon bonds, which come due in 2021, fell to around 58 cents on the dollar. 

But things are starting to look up.

Path to Safety
Navistar, which nearly collapsed a few years ago, is looking healthier now with a new stake from German auto giant Volkswagen. Some speculate VW could eventually make a full acquisition of the truck maker.
Source: Bloomberg

Last quarter, Navistar returned to profit for the first time in four years, earning $4 million, even as revenue continued to plunge year over year. Analysts forecast a rise in net income when the company reports third-quarter results Thursday.

Green Light
Navistar's profit is no longer in the red. Can it stay on course?
Source: Bloomberg

Now, Wolfsburg, Germany-based Volkswagen is buying a 16.6 percent stake, which it promises to hold for a minimum of three years. That is a huge vote of confidence, especially from a company that doesn't need any more headaches. Navistar's stock surged 44 percent to its highest level in more than a year, and those bonds mentioned earlier were yielding 8.8 percent, versus almost 16 percent earlier this month.

Shifting Gears
After losing three-quarters of its value in 2015 and massively underperforming its closest peers, Navistar is beginning to recover, with help from Tuesday's investment by Volkswagen.
Source: Bloomberg

As part of the alliance, Volkswagen can also appoint two directors to Navistar's board and the companies will share technology and the ability to source parts. Navistar was already about 20 percent-owned by activist investor Carl Icahn and about 20 percent-owned by his protege Mark Rachesky's MHR Fund Management, both of which bought the stock above its current level, according to data compiled by Bloomberg. Rachesky, another principal at his fund and two Icahn allies are currently members of Navistar's board.

This move by Volkswagen could even be a prelude to a full acquisition. Until then, Navistar just has to keep trucking along. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net