Will Volkswagen Diesel Engines Save Navistar?

Navistar International Inc. (NYSE: NAV) announced a strategic alliance with the truck and bus division of Volkswagen that included an unspecified equity investment by the German automaker and framework agreements for strategic technology and supply collaboration and a procurement joint venture. Volkswagen will acquire 16.2 million shares of newly issued Navistar stock for $256 million in cash.

The amount of stock VW is acquiring is roughly equal to the percentage (19.9%) held by activist investor Carl Icahn on a pre-transaction basis. After the new stock has been issued, VW’s stake will amount to 16.6% of outstanding undiluted shares. Presumably Icahn’s share will experience similar dilution.

What the two companies have in common are failures in developing technology to clean up diesel engine emissions. In 2012 Navistar finally gave up on coming up with its own clean-diesel technology and fired the CEO who had led the company down that path for nearly a decade.

Navistar began sourcing engines for its trucks from Cummins Inc. (NYSE: CMI) in 2012 and continues to do so. In July, Navistar recalled nearly 1,200 big rigs to repair a defect in the engines. Cummins has had its own problems with demand, but this is not good news for the company and the stock was down nearly 6% in late morning trading.

Volkswagen’s own troubles with clean diesel engines is far worse, of course, magnified by the number of vehicles sold and the lies the company told to sell those millions of cars. But VW acquired Germany’s MAN and Sweden’s Scania, both well-known commercial vehicle makers.

It is ironic that Navistar’s diesel truck business may be saved by a Volkswagen diesel engine, but that could happen.

Another thing that could happen is that VW would buy all of Navistar. According to a report morning from Reuters, VW’s truck division CEO answered a question regarding a full merger with Navistar this way: “On our way to becoming a global champion all options are open.”

Navistar stock, which had been trading up about 30% in the premarket zoomed, up 60% to $23.45 from Friday’s closing price of $14.07.

The North American market for Class 8 trucks (the 18-wheelers we see on U.S. roads and highways) is in a funk. According to industry analyst firm FTR, July orders netted out at just 10,400, down 56% year over year. The annualized order rate is now down to 210,000, well below a March estimate that 2016 net orders would total 250,000, a number 25% lower than 2015 net orders.

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