March 14, 2017 / 9:07 AM / 6 months ago

Volkswagen leaves door open on M&A as VW brand struggles

WOLFSBURG, Germany (Reuters) - Volkswagen (VOWG_p.DE) left the door open to a potential tie-up with Fiat Chrysler or another rival on Tuesday, as a drop in operating profit at its biggest car brand showed the challenges it still faces 18 months on from its emissions scandal.

The German company is likely to see heightened competition in Europe after Peugeot maker PSA Group agreed this month to buy General Motors’ Opel business to create a stronger second player in the region behind VW.

Fiat Chrysler Automobiles (FCA) boss Sergio Marchionne said last week that the deal might eventually persuade VW to seek a tie-up with his own company, a suggestion that was swiftly rejected by VW..

But in an apparent change of tone, VW CEO Matthias Mueller signalled on Tuesday he might be interested in partnerships.

“We are more open on that account than we used to be previously,” he said as VW presented its detailed 2016 results, adding this had “nothing to do with FCA specifically.”

“It would be very helpful if Mr. Marchionne were to communicate his considerations to me too and not just to you,” he told reporters.

FCA shares rose more than 2 percent following the comments, while VW’s were little changed.

A combination of VW and FCA could in theory create a European market giant with a share of around 30 percent, give VW a strong foothold in North America through FCA’s Chrysler operations and fix FCA’s lack of scale in Asia.

But any tie-up would also likely mean thousands of job losses that unions and politicians in Italy and Germany would strongly oppose.

VW BRAND STRUGGLES

VW said last month it made a record group operating profit in 2016, excluding one-off items, helped by a strong performance from its Porsche sports cars and a turnaround at its Scania trucks business.

Breaking down the figures for the first time, the company said on Tuesday underlying operating profit at its VW brand fell 10 percent to 1.9 billion euros ($2 billion), with the profit margin slipping to 1.8 percent from 2 percent in 2015.

VW Golfs are loaded in a delivery tower at the plant of German carmaker Volkswagen in Wolfsburg, Germany, March 14, 2017. REUTERS/Fabian Bimmer

The group said a dip in revenues and higher marketing costs as a result of the September 2015 admission that it cheated U.S. emissions tests on diesel engines were factors in the declines.

Although the group as a whole has bounced back from the scandal, and overtook Japan’s Toyota last year to become the world’s biggest selling carmaker, analysts view a turnaround at the VW brand as key to its prospects.

The brand accounted for almost half of 2016 group revenue, but only just over 10 percent of underlying operating profit.

The brand struck a deal with unions in November to cut jobs and target 3.7 billion euros of annual savings by 2020 in an effort to lift the profit margin to 4 percent that year - still below many major rivals.

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But squabbles over implementation have sowed doubts among some analysts about whether the targets will be achieved.

‘DON‘T WASTE TIME’

“In times where most other car companies are improving efficiency and shaping the industry, VW needs to be very mindful not to waste any more time with internal power struggles,” Evercore ISI analysts said in a research note to clients.

Mueller said VW was “back on track” after agreeing to spend up to $25 billion in the United States to address claims from owners, environmental regulators, states and dealers over its emissions scandal.

“You can rest assured that we will do everything in our power to make 2017 an even better year than 2016,” he said at the 12-brand group’s annual news conference.

He reiterated forecasts for a rise of up to 4 percent in sales revenues this year and a group profit margin of 6-7 percent versus 6.7 percent in 2016, and said the group was capable of shouldering its emissions scandal costs.

The company’s annual report showed VW brand boss Herbert Diess saw his total remuneration for 2016 drop to 3.93 million euros from 7.13 million in 2015.

($1 = 0.9394 euros)

Reporting by Andreas Cremer; Writing by Mark Potter; Editing by Maria Sheahan/Keith Weir

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