RPT-Fitch: Scania Offer to Erode Volkswagen's Rating Headroom
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Feb 24 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings says that the successful realisation of Volkswagen AG's (A-/Positive/F2) tender offer to buy out Scania's existing shareholders for a total value of approximately SEK60bn (EUR6.7bn) could diminish Volkswagen's current rating headroom. Although the success of this offer in itself would not materially weigh on the group's financial profile, it is another clear illustration of the group's aggressive acquisition strategy.
Volkswagen's key credit ratios remain strong for its current ratings, including solid margins, strong underlying cash generation and low leverage. In particular, we expect the group to cover between 40% and 50% of the contemplated acquisition through its 2014 free cash flow. We also acknowledge the balanced debt and equity financing used for this significant transaction. As a result, we calculate that pro forma funds from operations adjusted gross leverage will only moderately increase at end-2014.
However, the transaction further illustrates the group's acquisitive nature and strategy to achieve growth through M&A, and hence its increasing complexity. It comes while an offer on MAN's remaining shares is still pending and could cost Volkswagen up to EUR3bn, and follows the recent acquisitions of Porsche, Ducati and an already large stake in MAN.
The offer is subject to Volkswagen achieving more than 90% ownership of Scania between 17 March and 25 April 2014, and is set to be financed by a capital increase of up to EUR2bn and new hybrid capital. It is driven by Volkswagen's expectation that it will be able to improve the competitiveness and efficiency of its truck business following the full integration of Scania in the group and the intensified cooperation between Scania, MAN and Volkswagen. Volkswagen currently owns 74% of MAN (75.2% of voting rights) and has implemented a domination and P&L transfer agreement, and 49.3% of Scania (75.2% of voting rights). MAN owns 13.3% of Scania (17.4% voting rights). Synergies are currently limited because of arm's-length requirements.
Volkswagen targets EUR650m of annual synergies from joint R&D, purchasing and sourcing, up from EUR200m to be achieved by end-2014 with the existing structure. While we acknowledge the savings potential, we believe that they will not fully accrue before at least a decade given the long development times typical of the heavy-truck industry, the difficulty in combining and managing different brands and the technologies already developed by each company to be used in the medium term.