Rolls-Royce wants a slice of MTU

Daimler AG and Rolls-Royce Group plc announced on 9 March that they intend to launch a public tender offer for 100% of the share capital of Tognum AG. The public tender offer is intended to be carried out by a 50:50 joint venture company.

The Tognum board of management, having considered the offer, said that in principle it welcomes this step. “We would create one of the world’s technology leaders in propulsion systems and distributed energy systems,” said Volker Heuer, CEO. “For us, Daimler and Rolls-Royce would be two financially strong strategic investors, who have made a clear commitment to Tognum’s continued internal and external growth strategy. It would put us in an excellent position to play an active role in shaping the further consolidation of the market.”

The aim is to create a leading global player in the industrial engines market, based on the MTU and Bergen brands. As well as enhancing Bergen’s own growth prospects, it aims to strengthen Tognum’s position and to establish a broad range of products, systems and services with a global sales network The two companies believe that this will increase market penetration in emerging economies with above average growth, and address a global market worth more than €30 billion a year.

According to the joint statement, Daimler is an automotive company with strong capabilities in engine technology and manufacturing expertise, and exceptional access to global markets. Rolls-Royce has complementary world leading capability in integrated power systems and services, and a well established market presence in the marine, energy and defence sectors. Tognum AG is listed on the Frankfurt Stock Exchange, and is a premium supplier of engines, propulsion systems and components for marine, energy, defence, and other industrial applications.

The proposed joint venture, comprising Tognum and Bergen, the gas and diesel medium-speed engine business owned by Rolls-Royce, will offer significant advantages to Daimler, Rolls-Royce and Tognum. The markets in which the joint venture will operate are attractive and fast growing, especially in the developing economies. The statement goes on to say that: “By combining the strengths and market access of the companies, the joint venture will be able to offer a compelling portfolio of products, services and integrated solutions on a global basis, thus enabling the joint venture to become a world leading engine systems company and creating additional value for shareholders. The partners intend to maintain the current manufacturing sites and are confident that the growth strategy will secure jobs and lead to further opportunities. This may include investment in new state-of-the-art plant and facilities to enable growth and deliver productivity improvements.”

Daimler and Rolls-Royce will offer Tognum shareholders €24 per share in cash representing a total consideration of about €3.2 billion. This represents a premium of 30% above the closing price of Tognum shares on 4 March 2011, the last undisturbed trading day before the transaction was rumoured in the markets, and a premium of around 22% above the weighted average price of Tognum shares over the three months before the announcement of the transaction. Daimler holds a 28.4% stake in Tognum which will be tendered into the takeover offer at the offer price.

Sir John Rose, chief executive, Rolls-Royce Group, said: “This is a significant opportunity to harness the innovation, technology and engineering expertise of Rolls-Royce, Daimler and Tognum. The complementary capabilities we are bringing together will provide us with a world leading proposition, and will enable us to expand the business by developing a broader portfolio of integrated power systems and services for existing and new customers.”

Dr. Dieter Zetsche, chairman of the board of management of Daimler, said: “Tognum is an excellent company, and the combination with Daimler and Rolls-Royce creates a win situation for all parties. The planned combination will provide a strong platform to realise the huge market potential. It is an exciting proposition for Daimler to partner with Rolls-Royce to further invest in the Tognum business to create growth for the company and create additional value for our shareholders as well as for the customers and employees of Tognum.”

The joint venture allows Daimler to further enhance its shareholding in Tognum.Daimler will be a partner in research and development to develop modern and highly efficient engine systems and make a significant contribution to the efforts to meet ever more stringent emission standards. In addition, Tognum will benefit from Daimler’s strong global network. Daimler will secure its business relationship with Tognum as an engine supplier and will also continue to add to the Tognum product range with its diesel engines, thus further bolstering its business relationship with Tognum.

Rolls-Royce will contribute its medium speed reciprocating engine business which trades under the Bergen brand name to operate within the new joint venture company. The portfolio includes diesel and gas powered reciprocating engines which address the marine propulsion and auxiliary power markets. Rolls-Royce also brings a proven capability to deliver complex integrated systems and solutions in these growing markets where customers increasingly require a total solution approach.

The joint statement continues: “The benefits of complementary technologies, a common commitment to innovation, increased focus on systems solutions and through life customer support and broader market access will create considerable growth opportunities. Productivity will be enhanced by the benefits of scale, combining operational capabilities within the venture and delivering improved solutions to the benefit of both customers and shareholders. As such, the combined portfolio will be well positioned to become one of the world’s leading industry players in the marine, distributed power generation, offshore oil & gas and industrial applications markets.”

The offer is subject to clearance by the appropriate merger control authorities and achievement of a minimum acceptance threshold of at least 50% plus one share (including the 28.4% stake in Tognum to be tendered by the Daimler subsidiary) of the currently issued share capital of Tognum.

The shareholder agreement contains provisions allowing either party to exit the joint venture under certain circumstances. In addition, Rolls-Royce could be required to acquire Daimler’s stake in the joint venture at cost subject to certain adjustments.