Statement of the Board of Directors of Scania in relation to the unsolicited public offer by MAN
This statement is issued by the Board of Directors (the “Board”) of Scania AB (“Scania” or the “Company”) pursuant to item II.14 of the Stockholm Stock Exchange Rules concerning Public Offers for the Acquisition of Shares (the “Takeover Rules”).
MAN AG (“MAN”) has on September 18 2006 announced a public unsolicited offer to the shareholders of Scania to acquire all outstanding shares in Scania (the "Offer"). The initial offer price was amended on October 12 2006 following market purchases of Scania shares. The Offer was rejected by the Board in its announcement of October 12 2006.
As set forth more fully in MAN's offer document published on November 16 2006 (the “Offer Document”), Scania's shareholders are being offered to tender their shares to MAN for the consideration of €51.29 per Scania A and B share (the "Offer Consideration"). The consideration offered per Scania share consists of either (a) a mixture of cash and new MAN ordinary shares, or (b) cash only. Under the cash and share alternative, MAN offers €41.12 in cash and 0.151 in new MAN shares per Scania share and under the cash only alternative MAN offers €51.29 in cash per Scania share. MAN also offers a cash alternative of SEK 475 for each Scania shareholder who holds in aggregate 100 or less Scania shares. Moreover, MAN offers a mix and match facility subject to a maximum of 26,686,493 new MAN ordinary shares under the mixture of cash and new MAN ordinary shares alternative.
According to the Offer Document the acceptance period will run from November 20 2006 to December 11 2006 subject to any extension.
The completion of the Offer is conditional upon, among other things, being accepted to such an extent that MAN becomes the owner of more than 90 percent of the total number of shares and votes in Scania. MAN has reserved the rights to waive this and other conditions of the Offer; to take actions in order to initiate implementation of a forced merger between MAN and Scania whether or not MAN reaches a 90% ownership in Scania; and to withdraw the Offer in the event that it is clear that any of its conditions are not fulfilled or cannot be fulfilled.
The Offer Document contains information to the effect that MAN holds shares representing 11.63% of the issued share capital and 14.54% of the votes in Scania.
Volkswagen AG, representing 34.00% of the votes in Scania, announced on November 17 2006 that it will offer its interest in Scania only if MAN has received commitments to tender representing at least 71.31% of Scania’s capital and at least 56.01% of Scania’s votes.
In a press announcement made public on October 12 2006, Investor AB rejected the Offer with reference to MAN’s Offer not reflecting the value of Scania and the potential synergistic benefits of a combination of the two companies. On November 7 2006 Investor AB increased its holding in Scania to 20.01% of the voting rights. Following a dispensation from the mandatory offer rules granted by the Securities Council (AMN 2006:44), Investor AB and the Wallenberg Foundations on November 17 2006 entered into a co-operation agreement regarding their combined holding in Scania, which at present corresponds to 30.6% of the votes and 16.8% of the capital, as well as 33.7 % of all shares of class A issued by Scania. Thus, the avenue of forced merger between MAN and Scania is not achievable without the support of Investor AB and Wallenberg Foundations.
Scania’s standalone growth prospects
Scania is and has for many years been the most successful and profitable company in the European truck industry and has excellent growth and earnings prospects as a standalone business.
In Western Europe, industrial growth is driving increased demand for transports. Additionally, increasing exports to Central and Eastern Europe and a shortage of transport capacity are expected to underpin the robust market dynamics. Orders from markets in the European Union have been less affected than previously anticipated by pre-buy effects in the run-up to the Euro 4 environmental regulation.
In Central & Eastern Europe and the CIS states, rapid economic expansion has led to significantly increased demand for freight services and trucks. Demand is supported by continued rapid economic growth, the adoption of western consumption patterns and relocation of Western European manufacturing. Ongoing infrastructure investments are expected to further increase freight volumes. Moreover, premium brand manufacturers are benefiting from eroding local competition.
Scania is also well positioned in other markets, such as South America, Far East, Asia and the Middle East where economic growth is expected to drive continued strong demand for heavy trucks and buses.
The heavy truck segment is the major beneficiary of increasing inter-regional trade and higher demand for long-haul freight. It is growing significantly faster than the segment for medium-sized trucks.
Scania is positioned for profitable growth
Scania is well positioned in the heavy commercial vehicles segment to benefit from the strong growth in its key markets:
• Scania focuses on the European markets including Central & Eastern Europe and the CIS states; as such it is well positioned to benefit and deliver sustainable profitable growth. Scania is not exposed to the more volatile North American market.
• Scania is well positioned with further potential for capacity expansion within the existing production structure. This will allow Scania to meet expected demand with the current structure and expand current capacity to 100,000 trucks by 2009/10 with limited additional capital expenditure.
• Scania has continually streamlined its production processes to improve its efficiency. Recent projects include rationalising the European axle and gearbox production structure. This project is expected to lead to savings of SEK 300 million per year starting in 2007.
• Scania's productivity track record can be illustrated by the number of vehicles manufactured per employee over time. In 1990 Scania manufactured 2.5 vehicles per employee, while it currently manufactures 6.1 vehicles per employee and targets to manufacture 10 vehicles per employee around 2010.
• Scania's premium brand strategy is supported by Scania's leading technology capabilities. Scania is well prepared for the future due to its cost effective modular product approach and its joint development programmes. Together with Cummins, the Company has already secured the technology required to meet Euro 6 environmental regulation. Strategic alliances where resources are pooled are an integral part of Scania’s strategy.
• Scania's captive service network provides it with further growth opportunities. The Company will continue to benefit from increasing service revenues as a result of a substantial increase in the rolling fleet, increased outsourcing by fleet operators and an expanded service offering.
• Scania targets to reduce annual costs in the captive network by more than SEK 500 million per year through sharing of corporate functions (eg IS/IT systems, purchasing, centralised back office, marketing) across countries and regions. The benefits are expected to be fully realised by 2009.
• Scania offers customer finance services in all European markets and in an increasing number of emerging markets. In those markets, Scania maintains a market penetration of more than one third of new vehicle sales. During 2006, new operations were established in Turkey and Chile.
Strong current trading
In the first nine months of 2006, Scania reported record earnings and cash flow. As compared with the same period in 2005, revenues and operating income increased 15% and 31%, respectively. Earnings increased significantly year-on-year on the back of substantially higher volume and increased capacity utilisation.
Scania’s deliveries are expected to total some 65,000 vehicles during 2006, an increase of approximately 11% over 2005, and operating income is expected to substantially exceed SEK 8.0 billion.
Order bookings for trucks rose by 12% during the first nine months of 2006. So far in the fourth quarter 2006, orders have been stronger than in the corresponding quarter in 2005. Based on current order bookings and a sizeable order backlog, Scania has decided to further increase the rate of production in the first quarter of 2007.
Excellent future prospects
In conjunction with its third quarter results released on October 16 2006, Scania management announced updated guidance to the market:
Scania’s balance sheet is well capitalised and provides further opportunities to enhance shareholder returns. Since 2002, Scania has on average delivered a dividend payout ratio in excess of 50%, with a current payout ratio of approximately 65%.
Following the capital review announced in July 2006, Scania´s management concluded that the company would have the ability to make a special distribution of up to SEK 7,000 million, equivalent to SEK 35 per share, before the end of 2006.
In 2007, based on forecast strong earnings and cash flow, Scania´s management is of the opinion that the company would be in the position to distribute an additional amount of up to SEK 10,000 million (including ordinary dividend),equivalent to SEK 50 per share, and still maintain an investment grade credit rating as a standalone company.
The Board will review the size and timing of such distributions to be proposed to a shareholders meeting for decision once the situation surrounding MAN’s Offer has been resolved.
Synergies from a combination of Scania and MAN
The management of Scania has undertaken a detailed assessment of the synergy potential of a successful combination of Scania and MAN’s commercial vehicle business and has identified specific economies of scale and economies of skill in areas such as production, sales and service, customer finance, sourcing and administration/IT. Due consideration has also been given to mitigating potential integration risks such as loss of market share, failure to safeguard brand differentiation, short term increased funding costs, failure to integrate cultures and focus on realising cost synergies instead of enhancing customer value.
If the integration plan is carefully managed and executed, Scania management has concluded that over the long term higher synergies than those announced by MAN are achievable. However, short term these synergies may be widely overstated. This is among other things due to the existing long term job protection agreements entered into between MAN and its German labour unions, restricting timely realisation of synergies.
Assessing the Offer by MAN
As a result of the movement in the SEK / Euro exchange rate, MAN’s cash only alternative corresponds to SEK 465 (“Current Cash Offer”), whilst the highest price paid by MAN in the market for Scania shares is SEK 475. Additionally, based on the unaffected MAN share price of €59.3 , MAN’s cash and share alternative corresponds to SEK 4542, or 4% below the highest price paid by MAN in the market for Scania shares.
The Board is of the opinion that MAN’s Offer Document contains a number of possible breaches of the Takeover Rules, including the Offer Consideration not reflecting the highest price of SEK 475 paid by MAN in the market. The Board has filed a complaint with the Securities Council which is currently investigating these issues.
The Board believes that MAN’s Offer and the higher prices it paid in the market for Scania shares substantially undervalue Scania on the basis that:
• the Offer was made at an opportunistic time when Scania trading was affected by the negative sentiment regarding prospects of the general truck market;
• the Offer shows little or no premium compared to Scania’s trading benchmarks; and
• when compared to previous acquisition multiples offered for Scania, the Offer is at a substantial discount
The timing of the Offer is opportunistic. When the Offer was announced, the trading of Scania was negatively affected due to (i) uncertainty regarding the impact of pre-buying on new Euro IV emission legislation, and (ii) the market was not anticipating the demonstrated sustained demand in the European heavy truck market that became apparent after the summer and in the third quarter results.
Furthermore, following the release of Scania’s third quarter results and profit guidance on October 16 2006, research analyst estimates were significantly revised upwards.
Lack of control premium
When MAN’s Offer is measured against the relevant Scania trading benchmarks, the Offer shows little or no premium for control and in certain cases represents a discount.
• Scania’s average current year AV/ EBITDA (aggregate value/earnings before interest, tax, depreciation and amortisation) multiple across the cycle is 7.6x . Mid-cycle multiple is a relevant trading benchmark given that Scania foresees continued sustained growth in the European heavy truck segment. The Current Cash Offer, at 8.1x current year EBITDA represents a premium of 7% against this benchmark.
• Since 2000, Scania has traded on average at a 35% premium to its European truck manufacturer peer group . Applying this premium to the current average AV/ EBITDA trading multiple of Scania’s peer group results in a multiple of 8.9x . The Current Cash Offer represents a discount of 9% against this benchmark.
• Historically, Scania has been trading more in-line with the Swedish capital goods companies than its European truck peers given its high margins. Currently, Swedish capital goods companies are trading at 9.1x EBITDA - the Current Cash Offer is at 11% discount against this benchmark
Large discount to previous acquisition multiples offered to Scania
Furthermore, when compared to the previous acquisition multiples involving Scania, MAN’s Offer is significantly lower. Volvo agreed to pay 11.4x AV/ EBITDA in 1999 and Volkswagen agreed to pay 12.0x AV/ EBITDA in 20009, for a minority stake in Scania, implying share prices of SEK 639 and SEK 673, respectively if these multiples are applied to Scania’s LTM EBITDA as of third quarter 2006. The Current Cash Offer multiple at 8.3x AV/ LTM EBITDA9 represents 27% and 31% discount to both Volvo and Volkswagen’s offer multiples, respectively.
Recommendation by the Board of Directors
The Board of Directors has based its recommendation on an assessment of factors that the Board has deemed relevant in relation to the Offer, including, but not limited to assumptions regarding Scania’s business and financials.
Under the Takeover Rules the Board of Scania is required, based on MAN’s statements in the Offer Document, to express its views on the effects of the implementation of the Offer on Scania and specifically employment, and on MAN’s strategic plans for Scania and their likely repercussions on employment and business locations.
MAN has stated in its Offer Document that “As a general principle, MAN foresees a balanced approach to the distribution of component production between the two companies and is convinced that the combination can be achieved and the synergies that have been identified secured”.
The Board of Scania has noted that MAN has entered into long term job protection agreements with its German labour unions, which in practice means that any headcount reduction will most likely be taken out of the more efficient Scania operations.
Scania’s labour unions have jointly responded to the MAN Offer. On November 21 2006 representatives of Scania Metal Workers Union and SIF (white collar workers union) stated that MAN should withdraw its offer. The existence of job guarantees in Germany until 2012 evidently impairs the possibilities of an equitable and efficient combination. Scania and its employees will have to bear the entire burden of cost synergies or possible market downturns. The trade unions at Scania’s manufacturing units outside Sweden stand behind the criticism against MAN’s offer.
The Board is of the opinion that the structure of a combined company must be guided by commercial rationale and transparency.
The Board of Scania is of the firm view that the offer from MAN substantially undervalues Scania:
• Scania is the most successful and profitable company in the European truck industry and has excellent growth and earnings prospects as a standalone business.
• MAN’s announced synergies underestimate the long term synergy potential of a carefully managed and executed combination of Scania and MAN. However, short term these synergies may be widely overstated.
The Board unanimously recommends Scania shareholders not to accept the Offer as it substantially undervalues Scania. This recommendation is supported by opinions rendered by Deutsche Bank AG and Morgan Stanley & Co. Limited that were given to Scania’s Board to the effect that, subject to the assumptions set out therein, the Offer Consideration is inadequate from a financial point of view to the shareholders of Scania other than MAN and its affiliates. The opinions are attached to this press release.
The Board unanimously recommends Scania shareholders not to accept the Offer as it substantially undervalues Scania
Södertälje, November 24, 2006
Scania AB (publ)
The Board of Directors
This announcement contains forward-looking statements that reflect management's current views with respect to certain future events and potential financial performance. Such forward-looking statements involve risks and uncertainties that could significantly alter potential results. These statements are based on certain assumptions, including assumptions related to general economic and financial conditions in the company's markets and the level of demand for the company's products. This announcement does not imply that the company has undertaken to revise these forward-looking statements, beyond what is required under the company's registration contract with the Stockholm Stock Exchange, if and when circumstances arise that will lead to changes compared to the date when these statements were issued.