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Where there's smoke...
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The European market has been full of acquisition and mergers news recently, and rumours are still circulating regarding the future of Iveco and Dd. Can the smaller players go it alone? Oliver Dixon reports.
The current rumours that Rat is planning to sell its Iveco truck division are far from surprising. The debacle that is the VW-MAN-Scania hostile/friendly takeover/ merger — and the subsequent exit of VW Chief Executive Officer Bernd Pischetsrieder following a vote of no confidence —has placed the CV sector at the front of the minds of those who comment on market matters for a living.
Toyota's acquisition of a 5.9% chunk of Isuzu has had a similar effect.
With talk being cheap, it was only a matter of time before Iveco's future was under consideration once again. But this time, underneath the blather, some interesting points are emerging.
Not too many years ago. Fiat, like Iveco, was not performing well. This was not helped by a combination of dire market perception and management by fear. But things have improved markedly Iveco's first-half figures, released in July of this year, showed a trading profit up 81% to £163m (£111m) and a 5.2% hike in revenue to €2.29bn (£1.55bn). During the first half of 2006 it sold 89,500 vehicles; this is not the stuff of an ailing operation. Third-quarter results are due to be released any time now. and we have no reason to believe this trend will not be continued. But is this a good time for Fiat to set Iveco free?
The answer is a qualified maybe. On the one hand, Iveco's light-duty line-up— its Daily range — has been renewed, and with the bulk of the manufacturer's revenue coming from this sector.this would be a major weapon in a newly independent armoury.
At the heavy end of the range things are better than they were, but Iveco still holds only a mid-table position. The problem is simple: hauliers have long memories, and as a truck manufacturer you only get to screw up once before you wave farewell to your reputation — something that Iveco's management is all too well aware of (CM 5 October). It may be unfair, but the Stralis is still paying for the sins of its EuroTech and EuroStar parents.
Faith in new bosses
More pertinently,we would invest far more faith in Iveco's current management and structure than we would have done three years ago. Current CEO Paulo Monferino seems to have won the support of his staff. and he looks to be a safe pair of hands as far as developing what is being termed Iveco v2. And this is where talk of a divestment gets complicated. Fiat's deal with SAIC in China and Tata in India leaves an obvious role for a producer of heavy trucks. Indeed. Iveco has already been given a job to do in China, but where it stands in India is a moot point.
It is no longer a part of the Ashok Leyland family—having sold its 15% shareholding back to the Hindujas—but little information exists as to its future relationship with Tata, India's biggest CV builder.
It seems highly unlikely thatTata would have struck a deal in which commercial vehicles were excluded. So is the delay in an announcement of a future Tata-Iveco relationship a pointer to the former taking a lump of the latter?
There is very little that Tata is not buying at the moment, so it would be wrong to dismiss this possibility out of hand. A fair bit of Tata's current i4.6bn bid for steel maker Corus is being funded by leveraged money, and there is an increasing trend towards this sort of debt financing in India at present.
Is Tata interested in Iveco? We don't know, but it certainly has the necessary resources.
The mantra of shareholder value
Let's move the analysis back to Europe for a moment, and consider Daf — or, more pertinently, Paccar, a company for whom shareholder value is a mantra. Daf is a good, solid European company, but in a global world, does it offer enough to the US end of Paccar?
We assume that the MX engine range will cross the pond in time for EPA 10; one or two Leyland-built LFs have already been seen sporting both Peterbilt and Kenworth badges at various US trade shows, and if the truck proves a hit production will be started at Paccar's Mexican plant.
But is Daf big enough to hold its own in an increasingly verticalised Paccar, or would the addition of Iveco change the sums?
When viewed in a global context, Daf and Iveco offer a compelling fit. Iveco has considerable light vehicle and engine R&D capacities. Daf is good at the heavy end, and while there is a duplication at medium duty, the two companies boast an interesting network spread across Europe. Moreover, combine their R&D capabilities and you end up with an attractive package in which immediate benefits would accrue on both sides of the Atlantic.
But Paccar's exposure to the heavy US Class 8 market is a serious one, and with a North American market downturn of up to 40% expected over the next two years, the decision makers in Bellevue, WA are left with a tough call to make. If Iveco is up for grabs, does Paccar CEO Mark Piggot move in with his chequebook, or batten down the hatches and ride out the gathering storm on his own doorstep?
There is a flip side to this scenario. If the US market does slump, would Piggot be tempt rid Paccar of Daf?
Whichever way this goes, one or two abs truths do exist in a very confused enviroru DaimlerChrysler, Volvo-Renault and Scania-MAN (assuming it eventually hapj will all be big players. Iveco, by itself or with and Daf would suddenly look relatively sir
Inaction is not an option
As such, both need to act. With the dowt now fully in sight to all but the most myopi( is obviously not a good time to he consid big investments. But we would rate both 1 and Daf as being at risk of being caught] the European mergers and acquisitions wind. We would also point to Paccar as be possible taker of the 15% of Ashok Ley that is still up for grabs.
Fiat will lay out its plans this week.It cou an interesting meeting, and we wouldn't which option to back. The component pa] Fiat are worth far more than the comb group, and we have no idea what sort of sl holder pressure is being brought to bekTurin:This whole situation could be simpl) of an analyst in search of a stock pick,but th a lot of smoke rising at present, suggestirq there's a fire somewhere. •