Volkswagen AG (VOW)’s 6.7 billion-euro ($9.2 billion) bid for the rest of Scania AB (SCVA) is key to raising profit at its three truck brands by sharing technology and components in the same way that VW’s passenger-car brands have already successfully done.
The Wolfsburg, Germany-based manufacturer argues that using common parts at its commercial-vehicles operations is critical to taking on industry leaders Daimler AG and Volvo AB. (VOLVB) VW says the move requires the full integration of Scania, which it already controls, because the plan means the marques would need to share technology, something the Soedertaelje, Sweden-based company’s minority owners have opposed.
“It enables you to create economies of scale regardless of the volume you produce,” Horst Wildemann, a professor for business administration, logistics and production at the Technical University of Munich, told reporters last week at VW’s factory in Emden, Germany. “Scania (SCVB) has already made substantial progress in this area and can build vehicles with fewer different components than Volvo for example.”
VW’s namesake commercial-vehicles unit and its MAN SE (MAN) division, which are less profitable than Scania, stand to benefit from the truckmaker’s industry-leading expertise. This is exactly what some Scania owners have blocked, saying that helping the other two brands is not in the interest of the Swedish company and minority holders.
Photographer: Erik Abel/Bloomberg
A Scania logo is seen on the hub cap of a truck on the production line at the Scania AB...Read More
Share Reaction
VW is offering 200 kronor per share, 36 percent above Friday’s closing price of 147.50 kronor for the company’s B stock. The shares today surged as much as 35 percent to 198.90 kronor and were up 31 percent as of 9:47 a.m. in Stockholm, valuing the truckmaker at 154.9 billion kronor ($23.8 billion). VW fell as much as 7.5 percent to 185.90 euros and traded down 6.3 percent inFrankfurt.
VW plans to spend 2 billion euros from it reserves, raise 2 billion euros by selling new preferred shares and issue as much as 3 billion euros in hybrid capital to pay for the purchase. The German manufacturer’s net liquidity at the end of 2013 rose 60 percent to 16.7 billion euros.
“VW’s bid is very high, especially considering that they already have a clear voting majority at Scania,”Juergen Pieper, an analyst at Metzler Bank, said by phone. “I think it’s likely the remaining shareholders accept the offer, but uncertainties remain as some investors in Sweden seem to not just look at the price.”
Photographer: Erik Abel/Bloomberg
Employees mount the wheels to a truck on the production line at the Scania AB factory...Read More
Savings Targets
VW thus far has only achieved 200 million euros in purchasing savings from Scania, its own commercial-vehicles unit and German truckmaker MAN, which VW also controls. VW’s goal is to deepen cooperation between the three in areas such as drivetrains, chassis, cabins and electronics to reach annual operating profit synergies of 650 million euros. Given that developing new heavy trucks takes years, the automaker doesn’t expect to reach that goal for at least a decade.
Scania’s minority investors have thus far not bought into VW’s integration plan, and some instead this month asked for an independent auditor to examine whether ownership of the company by VW and MAN poses a conflict of interest. They oppose the elimination of a board-nominating committee and a 16 percent cut in the dividend for 2013 to 4 kronor per share. Investors over the weekend raised doubts about the offer.
“Scania’s prerequisites to maintain its leading position are better as a listed company than as a subsidiary in a larger group,” said Caroline af Ugglas, head of equities and ownership at pension provider Skandia, which owns 0.8 percent of Scania. “Skandia doesn’t intend to accept the offer.”
Independent Identities
The strategy VW has successfully applied at the passenger car brands is to share as much as possible while still keeping their independent identities. VW has said that its modular system for compact and midsize cars, which is the basis of models including the VW Golf and Audi’s A3, saves about 20 percent in costs per vehicle and reduces engineering hours by 30 percent.
“We plan the same modularity for heavy trucks,” Chief Executive Officer Martin Winterkorn said in an interview last March. “Sounds simple, but requires a huge effort.” VW declined over the weekend to make Winterkorn or other board members available to discuss their strategy.
VW trucks chief Leif Oestling is now trying to sell the takeover, something he opposed when MAN made a hostile bid for the Scania in 2006. As Scania CEO at the time, he described MAN’s offer as an unwanted “blitzkrieg.”
Investor Friction
The 68-year-old executive said three days ago that the current ownership structure, in which VW controls 62.6 percent of Scania’s share capital, has been “unsatisfactory for all parties” and one that “caused friction” among stakeholders.
“We’ve been working here in the past year and gradually came to the conclusion that this is one important step for an integrated truck group,” he said Feb. 21.
Scania’s 2013 operating profit rose 2 percent to 8.46 billion kronor. In the first nine months of 2013, Scania’s profit margin was 9.4 percent, while MAN’s was just 0.4 percent. MAN has yet to release full-year results.
VW only plans to pursue the bid if it can secure 90 percent of Scania, which is the threshold needed under Swedish law to force the remaining owners to sell their holdings and delist the company. Scania’s board said yesterday that a committee independent of the VW members will evaluate the bid and make a recommendation on the offer at a later date.
High Price
Arndt Ellinghorst, head of automotive research at ISI Group in London, said in a note to clients that the offer is too high given the size of the announced cost savings.
“There was no sufficient explanation provided on how this valuation was justified other than the fact that VW currently can’t exercise full control,” Ellinghorst said. “We especially struggle to understand the transaction’s benefits since it was confirmed that Scania, MAN and VW Trucks will remain independent companies.”
VW currently controls Scania via its direct holding and a stake owned by MAN. The German automaker started buying stock in the Swedish manufacturer in 2000 and acquired majority voting control in March 2008.
The automaker already has a domination agreement with MAN, which means the two can legally work more closely. That leaves Scania as the last of the three units preventing VW from fulfilling its goal of creating a heavy truck division that can better compete with Daimler and Volvo.
Source : http://www.bloomberg.com/news/2014-02-23/vw-s-scania-takeover-bid-key-to-unlocking-trucks-profit.html
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