Navistar Sets ‘Poison Pill’ to Block Hostile Takeovers

Navistar International Corp.’s board of directors last week moved to block a potential hostile takeover, as the truck maker tries to restore profitability and awaits Environmental Protection Agency approval for its new 13-liter engine.

Navistar said in statement that the anti-takeover move, sometimes called a “poison pill,” blocks an unfriendly buyer from purchasing more than 15% of Navistar’s stock. Investors Carl Icahn and Mark Rachesky each recently filed reports with the U.S. Securities and Exchange Commission disclosing they had made increased Navistar share purchases. Rachesky’s MHR Fund Management now owns 13.6% of Navistar’s stock, while Icahn has an 11.9% stake.

At the same time, rumors have been swirling in Europe that Volks-wagen AG, a leading auto and truck maker based in Germany, may have plans to seek to purchase Navistar.

The Navistar board’s “plan is designed to deter coercive takeover tactics, including the accumulation of shares in the open market or through private transactions and to prevent an acquiror from gaining control of the company without offering a fair and adequate price,” Navistar said June 20.

Icahn and Rachesky raised their individual Navistar stakes soon after the company reported on June 7 a $173 million quarterly loss and said it was still unsure when EPA would certify its engine as compliant with federal emissions regulations.

CEO Daniel Ustian tied the quarterly loss to “a lot of noise and speculation” about the engine EPA has been evaluating for five months.

After the Navistar board’s action, Carsten Krebs, director of corporate communications for Volkswagen Group of America, last week declined to comment. Both investors did not return calls seeking comment.

Earlier this month, a federal appeals court voided an interim EPA regulation that already has allowed the truck maker to pay $10 million in nonconformance penalties to continue selling its heavy-duty diesel engines that do not meet current emissions standards (6-18, p. 1).

Navistar has said it will ask the appeals court to rehear the case, but it had not filed a formal request for the ruling to be reconsidered by press time.

Navistar declined further comment when contacted by Transport Topics.

Although it has been using the penalties to produce heavy-duty engines in 40 states, the company also is using accumulated emissions credits to sell its engines in California and nine other states that do not allow the nonconformance penalties.

Navistar earned the emissions credits because its medium-duty engines were cleaner than federal regulations required in the past, and it has been using them since its decision to use exhaust gas recirculation in its heavy-duty engines. Those engines up to now have not been able to meet federal rules without applying the old credits.

Because the truck maker’s emissions credits are expected to run out later this year, Navistar has been counting on a new 13-liter engine it has asked EPA to certify.

The combination of the “poison pill” announcement, the investor purchases, Volkswagen takeover rumors and Navistar’s move to lower its full fiscal year profit to no more than $2 per share have sent the company’s stock on a see-saw ride in recent weeks.

Late last week, the shares

were trading around $28 per share. The stock has recovered since the day of the earnings announcement, when it dropped to nearly $20 a share and nearly reached $30 a share last week before dropping on the day the “poison pill” was announced. On the day before the earnings loss was announced, the stock closed at $28.39.

“The rights plan, by providing a path for merger and acquisition approved by the board, essentially forces would-be acquirers to engage the board in discussions prior to the announcement of an offer,” analyst Stephen Volkmann said in a report from Jefferies & Co. “Given that the board has a better insight to both the likelihood and the potential time frame for EPA certification of the engine, we see this as a prudent step to ensure a takeover fully accounts for the value of the company.”

Rachesky, who once was Icahn’s chief investment officer, has expressed interest in meeting with Navistar officials to discuss its operations. The two were rivals during a battle for control of Lions Gate Entertainment Corp., in which MHR is the largest shareholder at 36%.

Icahn hasn’t made any statements about his intentions regarding Navistar.

The company, based in Lisle, Ill., said it will give one preferred stock purchase right in the form of a dividend for each share held as of June 29.

That stock purchase right would permit shareholders to buy 0.001 share for $140, a move that’s intended to make the company’s stock prohibitively expensive.

Volkmann estimated that, if the rights plan were exercised, it would result in issuing about eight new shares for each one outstanding today, driving up the price.