VW’s Scania Takeover Bid Key to Unlocking Trucks Profit

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Bloomberg / February 23, 2014

Volkswagen’s 6.7 billion-euro (US$9.2 billion) bid for the rest of Scania 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.

Volkswagen argues that using common parts at its commercial-vehicles operations is critical to taking on industry leaders Daimler AG and Volvo AB, and requires full integration of Scania because the plan means the brands would all share technology, something Scania’s minority investors 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. “Scania 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 division, which are less profitable than Scania, stand to benefit from Scania’s industry-leading expertise. This is exactly what some Scania owners have blocked, arguing that helping the other two (competing) brands is not in the interest of Scania and minority holders.

Cost Savings

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,” CEO 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.”

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.”

“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.

Investor Opposition

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% 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.”

Better Margin

Scania’s 2013 operating profit rose 2 percent to 8.46 billion kronor ($1.3 billion). 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.

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 have gained 7.4 percent in the last 12 months, valuing the Swedish truckmaker at 116.8 billion kronor.

Explanation Needed

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.

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So VW, unable to grasp that the heavy truck business is totally different from the passenger car industry, believes they can buy and “share” Scania’s superior technology with MAN and VW Truck (Constellation), without damaging (gutting) Scania’s market position. VW’s CEO Martin Winterkorn certainly has a lot to learn about the heavy truck industry.

When Leif Oestling was Scania’s CEO, he opposed MAN’s VW-supported hostile bid for Scania in 2006. He aptly described MAN’s offer as an unwanted German “blitzkrieg.” But now that he has sold his soul to Volkswagen, and surprise, he’s now all for the change (he retires next year with a money chest from VW).

If VW successfully purchases the remaining shares of Scania and shares Scania’s cutting edge technology with MAN and VW Truck, then Scania will obviously have lost its unique identity in the global market as its once brand-unique components will have become a common market commodity.

In the first nine months of 2013, Scania’s profit margin was 9.4 percent, while MAN’s was just 0.4 percent.

MAN is a great company, but Scania is the most profitable truckmaker in the world. In profitability, only Paccar compares.