* Volkswagen to buy 16.2 mln new shares in Navistar
* To pay $15.76 per share, 12 pct premium
* Deal includes procurement JV
* VW could increase Navistar stake at later point
* Navistar sees at least $500 mln in savings over first 5 years (Recasts first paragraph; adds company comments, analyst comments; updates stock price)
By Nick Carey and Edward Taylor
CHICAGO/FRANKFURT, Sept 6 (Reuters) - Volkswagen has agreed an engine technology and purchasing alliance with truckmaker Navistar and will buy a stake in the U.S. firm, giving the German company a long-sought foothold in North America and providing cash-strapped Navistar a vital lifeline.
Analysts said they believe Volkswagen’s $256 million purchase of the 16.6 percent stake is a first step toward buying all of Navistar, whose shares shot up more than 40 percent after the announcement on Tuesday. Volkswagen’s shares were flat.
The companies said the deal will help both sides cut costs and provide a source of new engines for Navistar, which has sought a partner ever since its heavy-duty diesel truck engine failed to win approval from U.S. regulators in 2010.
A strong partner will also help shift the dynamics of the North American truck market, where Navistar ceded market share to the truck unit of Daimler AG, Volvo AB and PACCAR Inc.
Volkswagen has made no secret of its desire to enter the North American market and several analysts have pointed to Navistar, with its large dealer network, as a natural target.
U.S. regulators last month announced new environmental standards designed to cut greenhouse gas emissions from medium- and heavy-duty trucks by up to 25 percent by 2027, adding pressure on Lisle, Illinois-based Navistar to seek a technology partner.
Longbow Research analyst Neil Frohnapple said the deal had come earlier than he expected as the emissions standards will not start to take effect until 2018, but that cash-strapped Navistar would have struggled to meet the rules.
“Given Navistar’s financial position, they need to team up with someone or exit the engine business,” Frohnapple said.
Volkswagen’s next-generation engine for MAN and Scania trucks will be adapted to suit Navistar’s U.S. trucks, Volkswagen Trucks Chief Executive Andreas Renschler said. Volkswagen’s truck unit has not been involved in the emissions scandal that has hurt its car business.
Navistar CEO Troy Clarke told Reuters that having Volkswagen’s technological input should assuage any customer fears over whether the U.S. truck company could meet future U.S. emissions standards.
“If your concern was that Navistar was not a company that can do that, that concern should go away,” he said.
Clarke said that no agreement has been reached on whether Volkswagen engines will be made in Navistar’s North American plants, but he said it is an option.
‘DIP A TOE IN THE WATER’
Activist investor Carl Icahn holds 19.94 percent in Navistar, followed closely by MHR Fund Management LLC, founded by Mark Rachesky, a former associate of Icahn, which owns 19.88 percent of the company.
Navistar CEO Clarke said the deal had the unanimous approval of its board of directors. MHR and Icahn control two seats each on the board.
The alliance, first reported by Reuters on Monday, involves the creation of a joint venture for procurement, which Navistar said would help it realize savings of at least $500 million over the first five years.
Navistar said those savings will come from collaboration on procurement and technology, rather than job cuts.
Brian Sponheimer, analyst at Gabelli & Company, said the deal should give Navistar’s dealers an immediate marketing boost because it removes uncertainty over the truck maker’s future.
“The power of that consumer confidence boost should not be underestimated,” he said.
Volkswagen will pay $15.76 a share for 16.2 million new Navistar shares, a 12 percent premium to Navistar’s closing price on Sept. 2, the two groups said.
Volkswagen’s Renschler said “all options are open” when asked on a conference call if the deal could pave the way for a full merger with Navistar.
Stephen Volkmann, analyst at Jefferies, said that by buying a smaller stake in Navistar, Volkswagen “perhaps wants to dip a toe in the water rather than get completely wet,” but he expects the German automaker to eventually buy the rest of the truck maker.
Analysts said the pact could also improve VW’s chances of eventually spinning off its trucks arm.
“A more global company with exposure to the profitable North American market will make for a better story should VW look to IPO its trucks business in the future,” Arndt Ellinghorst, analyst at Evercore ISI said in a note.
VW shares closed up 0.2 percent at 125.05 euros a share. Navistar shares were up 42.4 percent at $20.03 a share. (Additional reporting by Joe White, Jan Schwartz and Maria Sheahan; Editing by Mark Potter, Greg Mahlich and Meredith Mazzilli)