Activist shareholders raise their stakes in Navistar

Thu Jul 12, 2012 1:09pm EDT

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(Reuters) - Three big investors have increased their stakes in embattled U.S. truck and engine maker Navistar International Corp (NAV.N), which last month surprised Wall Street with a quarterly loss and has since backed down from a new engine technology it was pushing.

Asset manager Franklin Resources Inc (BEN.N) is now Navistar's largest shareholder, with an 18.8 percent stake, topping MHR Fund Management and billionaire Carl Icahn. MHR last month took a significant stake in the company and now holds 14.95 percent; Icahn holds 13.19 percent.

Together, the three top shareholders hold almost 47 percent of the outstanding shares of the maker of International-brand heavy trucks and school buses.

Those larger stakes could set the stage for investors to pressure Navistar -- whose market value has fallen almost 40 percent this year -- to move quickly to improve its performance in a year when analysts expect it to lose money.

"I think there are a lot of back-room meetings going on," said Gimme Credit analyst Vicki Bryan. "They might be trying to work together to forge alliances that Navistar's management is not able to get accomplished."

MHR, founded by Mark Rachesky, declined comment, while Icahn and Franklin Resources did not respond to requests for comment.

Navistar Chief Executive Daniel Ustian and Troy Clarke, the company's recently appointed president of trucks and engines, last week laid out a change in engine strategy that failed to impress investors. After months of failing to win U.S. regulatory approval for a novel technology to cut emissions, Navistar said it would adopt the approach used by most of its rivals, including Cummins Inc (CMI.N) and Paccar Corp (PCAR.O): using liquid urea to help cut emissions of nitrogen oxide, a pollutant linked to asthma.

Navistar said a new engine it is developing would be ready by early next year, but investors fear its sales will suffer in the meantime.

Navistar shares were up 16 cents to $23.16 in afternoon trading on the New York Stock Exchange.

UP AGAINST THE POISON PILL

Navistar in June adopted a "poison pill" intended to keep any investor from acquiring a 15 percent or greater stake in the company.

Franklin Resources took its higher stake, which it disclosed in a filing with the U.S. Securities and Exchange Commission, prior to Navistar adopting the poison pill, Navistar said.

"They acquired all those shares prior to the adoption of the poison pill. There is no issue there," said Navistar spokeswoman Karen Denning. But she also said the poison pill would prevent Franklin Resources from buying more shares.

The MHR and Icahn stakes remain below the 15 percent trigger level.

Navistar's board adopted the poison pill to prevent a hostile takeover. It would allow existing investors with less than a 15 percent stake to buy new shares in the company at half price, which would dilute the holdings of anyone with more than 15 percent.

HITTING THE BRAKES

Navistar shareholders got more to worry about earlier this week when engine maker Cummins warned it no longer expects to be able to grow sales this year, as demand for trucks weakens in the United States and fails to improve in the key emerging markets of Brazil, China and India.

That news pulled down the shares of big U.S. truck and engine makers including Cummins, Navistar, Oshkosh Truck Corp (OSK.N) and Paccar.

"The market has been weak in North America and now is slowing in China and Brazil," said Robert W. Baird & Co analyst David Leiker. "There are a couple of tough quarters ahead for heavy trucks."

Navistar has been facing pressure from investors to sell itself or change its engine strategy. It has struggled for the past year to contain costs of developing a new type of diesel engine for heavy trucks.

Icahn, who also owns 9.5 percent of Oshkosh, last year pushed for a merger of that company and Navistar. Navistar CEO Ustian was open to the idea, but Oshkosh shareholders fought off Icahn by voting down a slate of directors he had nominated at the company's January shareholder meeting.

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.

Analysts have suggested that Navistar could be sold to a European truck maker. Fiat Industrial SpA FI.MI CEO Sergio Marchionne in June publicly flirted with the idea, telling reporters that Fiat was "interested in building our presence in the U.S. truck market."

But early this month Marchionne's deputy, Alfredo Altavilla, who runs Fiat's Iveco truck unit, poured cold water on the idea, saying "its (Navistar's) engine strategy is completely different from ours and there would be no platform synergy."

MHR's Rachesky worked for Icahn before starting his own investment firm. His company is the largest shareholder of film studio Lions Gate Entertainment Corp (LGF.N), a position it firmed up last year after Icahn gave up a long battle to take over the company.

The 39 percent slide in Navistar shares this year has been far steeper than the declines at its peers. Oshkosh is down 6 percent; Cummins, 5 percent; and Paccar, 4 percent.

(Reporting by Scott Malone in Boston with Bijoy Koyitty in Bangalore; Editing by Lisa Von Ahn and John Wallace)

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