Global Insight Perspective | |
Significance | The VW Group still believes that an amicable solution should be sought by MAN and Scania but also stressed that it would only part from its 34% voting right stake if MAN secured at least 71.31% of Scania's capital and at least 56.01% of its voting rights. |
Implications | VW's cautious endorsement of MAN's takeover attempt and explicit conditions are effectively putting pressure on MAN to convince other shareholders, including Investor AB, to sell their shares first before it can secure the sizeable lump of voting rights controlled by VW and required to obtain a 90% self-imposed voting rights limit. |
Outlook | By proposing to more than double dividends and issuing bright profit targets for 2006, Scania may influence shareholders to hold on to their shares, at least until MAN can propose a better deal. |
In a statement, the supervisory board of the Volkswagen (VW) Group has announced that it was supporting MAN's takeover attempt on Scania but would only consider selling its stake in the Swedish truck-maker if MAN manages to secure at least 71.31% of Scania's capital and at least 56.01% of its voting rights. VW maintained that it favoured an amicable solution with terms that are acceptable to all sides and added that it would not support a counter-bid by Scania at the present time. However, Scania and its second largest shareholder, Investor AB, are still unmoved by MAN's hostile or amicable solicitations and do not rule out a possible counter-bid. In the MAN-Scania merger saga, it appears that it is the target and its two shareholders that are pulling the strings, although not necessarily in the same direction.
On Friday (13 October) MAN raised its offer for Scania to about 475 krona a share in cash and stock and acquired 14.27% of Scania's voting rights and 11.48% of its capital share in an off-market purchase, but the increased offer was again rejected by Scania's management board and Investor AB. Under Swedish takeover law, MAN's offer is raised to the highest price it has paid for Scania shares (51.13 euro or US$63.9) valuing Scania at 10.3 billion euro, up from the original 9.6 billion cash and share offer. Investor AB said the bid did not "at all reflect the long-term value and potential of Scania." Scania's board said: "As in the case of MAN's initial offer, the modified offer substantially undervalues Scania." However, the VW Group, which owns an 18.7% stake in Scania and a recently acquired a 15% stake in MAN, is becoming increasingly impatient with the Scania board's resistance to a merger deal.
For its part, Scania has purposely brought forward the date of its reporting of third-quarter financial results from 30 October to 16 October. The company said that this is so that investors have as much information as possible to judge the bid by MAN. Subsequently, it announced that it will make a special cash distribution of up to 35 krona a share, thus redistributing some 7 billion krona to shareholders, and said it was expecting operating profit for the full year to surpass 8 billion kronor. In the third quarter, Scania's net profit rose 55% year-on-year (y/y) to 1.28 billion krona from 825 million krona. Operating profit soared 67% to 2.02 billion krona from 1.21 billion krona, thus generating an operating profit margin of 12.2%, up from 8.3% in the same period last year.
Outlook and Implications
By proposing to more than double dividends and publishing its third-quarter financial results earlier than scheduled, Scania wants to show shareholders that it can thrive on its own and can still compensate investors generously but also remind the sort of earning potential MAN is trying to capture while indirectly giving its own valuation for the company. In the current situation, the prospects of receiving 35 krona per Scania shares may convince many shareholders to hold on to their stocks, at least until MAN can propose a better deal.
On the other hand, VW's cautious endorsement of MAN's takeover attempt is a subtle strategic move, which is, in effect, redirecting pressure on MAN and Investor AB. VW has supported a possible tie-up between the two truck-makers since the beginning, only disagreeing with the technicalities of the deal. The VW Group holds 18.7% of the equity and 34% of the voting rights in Scania. By becoming a major shareholder in MAN, the VW Group confirmed its intention to play an active role in the sector's consolidation and possibly force its Brazilian truck operations into a merged MAN-Scania entity. However, by saying it would only tender its 34% voting rights to MAN when it has secured at least 56.01% of Scania voting rights, VW effectively puts itself in last position in the disposal order and therefore puts pressure on MAN and Investor to agree an acceptable price for the acquisition to move ahead. Initially, MAN said it wanted to control 90% of Scania voting rights. This means that Investor AB will have to sell its 29% voting right stake first for the deal to go through. MAN will have to propose a minimum 510 krona per share to stimulate Investor AB's interest.