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Sun 19 Dec 2010 12:00 AM

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Scania and MAN to merge

Scania could finally get its MAN. But what would it mean for the Middle East?

Scania and MAN to merge
MAN tried to overtake Scania in 2006, but it could find itself a junior partner in the merger.

As months go, the month of November was one of the more eventful
for Swedish truck manufacturer Scania.

On the one hand, it’s been linked with a merger with one of its
main rivals, MAN in Europe, and on the other its
CEO Leif Östling was among several of its senior executives that could face
legal charges after it was alleged that the company gave several millions of kronor
in kick-backs to ousted Iraqi dictator Saddam Hussein’s regime.

The company has maintained links in Iraq for decades.
In the early 1980s, Iraq
was one of Scania’s largest markets. At the peak in 1981, sales totalled
3,900 trucks in one year.

According to documents obtained by Swedish television, Scania
is being investigated for paying around $5 million in bribes to the Iraqi regime
for vehicles sold through companies in Russia
and Tunisia.

Company spokesman Hans-Åke Danielsson denied reports that
Östling may be charged in connection with the investigation, saying that: “Three,
four people within Scania are suspected of committing crimes, but Leif Östling is
not among them. He hasn’t yet been interviewed and he hasn’t been informed of any
suspicions against him.”

However it is not the first time Östling has been wrapped up
in controversy and – ironically – was once forced to apologise for comparing MAN’s
tactics to those of Germany’s
blitzkrieg campaign in the Second World War back in 2006.

Since both companies came under the influence of Volkswagen,
the two have enjoyed an uneasy peace.

Earlier this year, Östling refused to entertain the
idea of a merger and stated: “When it comes to MAN, we are looking to [identify]
areas of development where we can benefit – that could be in hybrids or battery
and combustion technology.”

However his company has now confirmed that it is considering
a merger with MAN after their parent company Volkswagen said it is prepared to moves
its shares between the two companies.

Volkswagen owns 46% of Scania, and 71% of the voting rights,
and is looking to boost its holding in the German truck maker to Scania. According
to German newspaper, Der Spiegel, should it be successful Scania may then offer
to buy out other MAN investors. MAN has a 13.4% holding in Scania.

The surprise resignation of MAN’s CEO Hakan Samuelsson last year
moved analysts to predict a three-way truck alliance between VW, MAN and Scania,
but that they weren’t counting on  MAN’s desire
to maintain
its independence.

However the deciding factor was always going to be VW’s ambition
for its two concerns and it’s clear that Scania and MAN have frequently been
encouraged to carry out joint development projects.

VW has actively sought closer links between its holdings for
several years after it bought shares in both to block a potential hostile takeover
of Scania by MAN. It moved its production chief Jochem
Heizmann to a new post overseeing the truck holdings and to forge
closer ties between Scania and MAN earlier this year.

VW would now appear to be prepared to force the hand of both
companies. It’s public declaration that it is prepared to strengthen Scania’s hand,
a means to shake MAN into accepting the inevitable.

Although news of the most recent talks between the
companies, was almost dimissed by MAN again which appeared to be non-comitted, referring
to the “speculation” of “industrial cooperation” with Scania as “still open and
no decisions have been taken”.

Scania, once a hostile takeoever target by its German counterpart,
would be elevated to the role of senior partner, and is clearly more positive about
the move.

“This process has shown that a full realisation of potential
synergies requires a closer cooperation by combining the two companies,” Scania
said in a statement. Almost forcing MAN to admit: “Both sides are com-mitted to
maintaining the operating businesses and the unique brand values of the companies.”

While they would gain important economies of scale, there is
significant overlap in their operations, particularly in Brazil, the world’s
fastest-growing market for trucks, creating a potential stumbling block in the way
of antitrust concerns.

VW, which has laid out an ambitious programme to overtake Toyota
Motor as the world’s premier car maker by 2018, signaled that changes were
coming to its truck business in October, when it appointed Jochem Heizmann, a member
of the
VW management board, to
head its group commercial
vehicles business.

With the outcome of VW’s convoluted acquisition of Porsche in
doubt: “VW is trying to figure out what to do with their majority Scania stake and
their MAN minority holding,” reckoned Hans-Peter Wodniok, an analyst at Fairesearch
in Frankfurt.

Scania’s merger with MAN would lead to the creation of Europe’s largest maker of commercial vehicles and make them
better able to compete in the
global truck market. Not least the Middle East
which is currently dominated by long time rivals Volvo and Mercedes.

VW has a decent record of supporting the market – even launching
a specialised line-up of diesel trucks in 2007 that can comfortably withstand temperatures
of 55o C.

Whether the new company would operate under the VW brand or their
own identity, the merger would enable Scania/MAN to forge even deeper penetration
in the market. Middle East government
contracts have been lucrative for both in the past but ironically one of the first
priorities could be continuing Scania’s progress in the Iraq market. It
has stepped up production and sales since 2009 and trucks ordered by government
customers are being assembled locally there.

Late in 2009, Iraq’s
State Company for Automotive Industry (SCAI) began production of the first of 500
trucks ordered under the terms of an agreement between Scania and Iraq’s Ministry
of Industry & Minerals. Production is taking place at the government’s Iskandariyah
industrial complex south
of Baghdad.

In many ways, the potential merger notwithstanding, the timing
of the news of the oil for cash accusations couldn’t have come at a worst time for
Scania in Iraq
as it rebuilds in the country. Iraq
is one example of somewhere where a quick resolution to the oil for cash claims
and the merger situation can’t come soon enough.

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