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Is Paccar the ultimate fahrvergnügen?

Jason Cannon July 3, 2014

Volkswagen Group refuted Thursday reports that it was interested in bidding for U.S. truck-maker Paccar in 2015. But that hasn’t stopped me from sitting here all day and wondering what a Volkswagen/Paccar jam up might look like.

On the surface, this deal doesn’t make a ton of sense. Last month, VW Group sold $2.7 billion in preferred stock to fund a takeover of Scania, which VW will fold with its own commercial-vehicle operations and MAN. That newly-minted truck division will go head-to-head with Daimler, at least in Europe. But a straight-up purchase of Paccar would bring with it DAF, giving VW yet another European truck operation. In all likelihood, DAF would be spun off and sold to someone else.

I think most of us expected a VW play for a U.S. truck maker to come in a bid for Navistar International. There are benefits to that. First, it would come at a steep discount compared to Paccar. Secondly, there’s no European component for VW to wrangle with, or to peel off and find another buyer.

In approving any potential sale, Paccar shareholders will be out for a premium. The company is super-profitable and shareholders will want to be compensated for their trouble. Again, this will come with a substantial markup over Navistar, which trades at roughly half the price of Paccar. A purchase of Paccar could cost VW upwards of 10-times more than it raised for Scania.

On the other hand, there are portions of this deal that make a ton of sense. Volkswagen has made no secret of its desire to become the largest automotive company in the world. A buyout of Paccar does that practically instantly. A product suite that includes Kenworth and Peterbilt puts Volkswagen in rarified air; up there with the likes of Daimler and Volvo.

Andreas Renschler was head of Daimler’s truck unit before he and Wolfgang Bernhard – Daimler’s current truck boss – swapped roles. Shortly after the job change, Renschler left Daimler and is now slated to oversee VW’s commercial vehicle operations next year – a commercial vehicle operation that doesn’t include a meaningful presence in North America.

Renschler is quite familiar with the North American truck market and Paccar’s place in it, and would inherit a massive dealership and service network should VW actually buy Paccar. Volkswagen would get marketshare with the stroke of a check, and don’t you think Renschler would like to go head-to-head with the guy who took his job?

So what do you think? Is a VW/Paccar deal on the horizon, or was this a case of someone speaking out of turn in front of a reporter? Is a VW deal for Navistar more likely?

Share your thoughts in the comments below.

Jason Cannon is Online Managing Editor for Truck Parts & Service.

You can follow me on twitter at @By_Jason_Cannon

  • dieselralph@yahoo.com

    I think you also need to consider that the premium for Paccar also avoids the pitfalls that a Navistar purchase would have. Underfunded pensions, huge loss of market share, warranty cost exposures on the failed MF engine, untold numbers of trade-ins with the failed MF engines with no one to buy them. Those trades have to be on the Nav books with a value that is unachievable in the resale market. Who will buy those trades? Just the accounting mess that must be Nav at this point would scare me off. It is very much a risk Vs. reward situation at Navistar and the German’s aren’t very good at taking risk unless they know the outcome. They like known quantities. If Nav flounders over the next few years, and the late switch to CMI engines can’t rescue them, that may be the time to buy Nav. When and if Nav flounders though, Nav won’t be the only one shopping for a trucking company. There are no shortage of Chinese or Indian buyers ready to pounce then.

  • Chris Patterson

    Making the highly speculative assumption that the founding family could be persuaded to part with its controlling interest in PACCAR, your estimate of the investment necessary to acquire the company is well below the reality. With a market cap, today, in excess of $23 billion, add a 35-50% premium on to pry the control block loose, and you find yourself in the mid-$30 billion range.. Not only is that a big bite even for a company the size of Volkswagen, it’s also about 15x (trailing) EBITDA, which is even above the nosebleed multiples that private equity is paying these days, for well-run, profitable companies.

    And you gloss over the DAF matter too lightly. Neither Indian nor Chinese candidates are in a strong position to make such a move, in today’s environment, given the difficulties they face in their home countries. Fiat Industrial (Iveco) has a weak balance sheet, and might not even get the combination past the European regulators. IF a buyer could be found, VW would not get 15x EBITDA for that portion of their purchase, given the forced nature of the sale, driving the cost of the assets they keep to even more ridiculous levels.

    Dr.Piech has done a lot of deals that have raised eyebrows over the years, and can never be ruled out completely, but this one would be over the top. Don’t count on it ever happening.

  • Chris Patterson

    Lest readers think I’m a voice in the wilderness, consider thisn from the Wall St. Journal:

    VW Should Keep Truckin’ Alone

    Paccar May Fit With Volkswagen’s Ambitions But This Isn’t the Right Time for a Deal

    RENÉE SCHULTES

    July 4, 2014 5:50 a.m. ET

    You have to wonder about your arch-rival’s motives when he starts playing deal maker on your behalf.

    The chief executive of Daimler’s trucks business told a gathering of analysts this week that “serious, multiple sources” had suggested rival Volkswagen was interested in buying Paccar. VW quickly denied interest in the $24 billion market capitalization U.S. truck maker, which makes the Kenworth and DAF brands.

    Buying Paccar would fit with VW’s undoubted global ambitions in trucks. But shareholders must hope that the German company keeps a cool head when considering such heavy-duty deals.

    VW has big plans when it comes to trucks. It has taken control of Germany’s MAN and more recently the Swedish truck maker Scania to build a business that made more than 200,000 trucks last year. Buying premium truck maker Paccar would add another 137,000 in unit sales, further narrowing the gap with Daimler’s larger volumes. It would also give VW’s Europe-weighted trucks business exposure to the U.S. and Canadian heavy trucks market where Paccar has a 28% share.

    But beyond empire-building, Paccar would be an odd choice for VW right now. For starters, Paccar’s shares trade on 18.5 times forecast 2014 earnings, a huge premium to VW on just 8.8 times based on FactSet estimates. VW would also have to pay a premium. But synergies in the trucks business can take more than a decade to materialize at the best of times. Savings may be even tougher to extract between U.S. and European manufacturers, which use different engine technology.

    Funding the deal also looks a stretch for VW. It has historically raised equity to do deals rather than dig into its cash pile, which it claims it needs to protect its all-important credit rating. But VW just asked preference shareholders for €2 billion ($2.7 billion) in fresh equity and sold a €3 billion hybrid bond to fund its buyout of minority investors in Scania.

    It would need to tap preference shareholders again for Paccar. In theory, VW could raise up to €18 billion in new preference shares at the current share price, according to ISI Group. But it can’t issue more ordinary shares unless the state of Lower Saxony, which can’t be diluted below 20%, pitches in.

    Whatever its rivals say, now doesn’t look the time for VW to back up the truck for a big deal.

    Write to Renee Schultes at renee.schultes@wsj.com

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