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Dan Ustian, CEO of Navistar International Corp. (MIKE SEGAR/REUTERS)
Dan Ustian, CEO of Navistar International Corp. (MIKE SEGAR/REUTERS)

Embattled Navistar adopts poison pill as big investors circle Add to ...

Embattled U.S. truck and engine maker Navistar International Corp. drew a line in the sand with activist investors on Wednesday by adopting a poison pill aimed at keeping outsiders from gaining a stake of 15 per cent or more.

Navistar made the move after hedge fund MHR Fund Management LLC last week disclosed that it now holds 13.6 per cent of the company’s shares, an even larger position than billionaire activist investor Carl Icahn’s stake of 11.9 per cent.

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Navistar shares fell 3.7 per cent to $28.29 on the New York Stock Exchange. The stock has been volatile this month following an unexpected quarterly loss as the company struggles to win U.S. regulatory approval for a new diesel engine.

Lisle, Illinois-based Navistar plans to issue current shareholders the right to buy a new series of Navistar common shares if any investor declares a stake of 15 per cent or higher - or makes a tender offer that would give the investor a stake of that size.

“The 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 acquirer from gaining control of the company without offering a fair and adequate price to all of the company’s stockholders,” Navistar said in a statement on Wednesday, following a scheduled regular board meeting.

If the plan were triggered by an outside investor taking a stake of 15 per cent or more in the company, Navistar would issue its shareholders rights that would let them buy ne w common stock in the company at a discount of 50 per cent: For each share held, the investor could buy $280 worth of new shares for $140.

The investor who took the 15 per cent stake or more would not have the right to buy additional shares.

The poison pill would make it easier for Navistar Chief Executive Daniel Ustian to resist outside pressure to either sell the company or change course on engine strategy, Morningstar analyst Basili Alukos said.

“Once there is one enacted, it becomes a little more challenging for a company to be acquired. But if someone is willing to step up, it can lead to higher share prices,” Mr. Alukos said.

He cited industrial gas supplier Airgas Inc. as an example of a company that used a poison pill to successfully fight off a takeover offer from rival Air Products and Chemicals Inc. and saw its stock price rise significantly.

Airgas executives justified the poison pill - breaking with some of their largest shareholders - by saying the $70-per-share offer from Air Products grossly undervalued corporate assets.

Airgas shares have risen about 38 per cent since February 2011, when a judge ruled that Airgas could use the poison pill.

The ruling effectively revived the use of poison pills, which had been on the decline for more than a decade, giving corporate boards yet another defense against hostile bids they consider inadequate.

Neither Mr. Icahn nor MHR immediately responded to requests for comment.

Check Engine

Beyond pushing for a sale of the company, outsiders could pressure management to change course on the new engine.

Unlike its rivals, who include Cummins Inc. and Paccar Inc., Navistar is pushing an engine technology that cuts emissions of nitrogen oxide, a pollutant linked to asthma, without using liquid urea. Navistar argues its technology is easier to use, as it spares drivers from having to monitor another fluid level.

In January, the company applied for U.S. Environmental Protection Agency approval of the engine, but later pulled that application and resubmitted it in late May. Last week, a U.S. appeals court rejected an EPA policy that allows the company to pay fines to sell non-compliant engines.

Analysts and investors have been calling for management to lay out what Navistar’s alternatives are.

“The board should be vigilant in advancing back-up plans,” said Rob Wertheimer, an analyst with Vertical Research Partners. “We also doubt buyers for trucks with an ambiguous emissions status would be easy to find.”

Change in tone

The poison pill signaled a change in tone at Navistar, which last year had been more open to outsiders, analysts said.

“This is likely to disappoint those still waiting/hoping for a takeover, while creating a level of conflict with large shareholders that has thus far been avoided,” R.W. Baird analyst David Leiker wrote in a note to clients.

After Mr. Icahn announced his stakes in Navistar and Oshkosh last year, he said he would seek board seats at each company.

Navistar avoided a contested election with a deal to change its board structure so that directors were elected for one-year terms. As a result, Icahn agreed to drop his slate of nominees.

Mr. Ustian said in December he was open to Mr. Icahn’s ideas.

“We have to pay attention to him, but it’s no different than anyone else,” Mr. Ustian said. “If we give them a return, they’ll be happy with it.”

Mr. Ustian was not available for comment on Wednesday. A Navistar spokeswoman declined to elaborate on the company’s statement.

No outside bidders have made an offer for Navistar, though the head of Italian truckmaker Fiat Industrial SpA, Sergio Marchionne, said early this month he was interested in expanding his presence in the U.S. truck market.

Over the past 12 months, Navistar’s stock has dropped 46 per cent, a steeper decline than Oshkosh’s 20 per cent. The Standard & Poor’s capital goods industry index has been little changed during that time.

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