Freightliner buys Western Star, Orion

by John G. Smith

KELOWNA, B.C. – Freightliner has purchased Kelowna, B.C.-based Western Star Trucks and Orion Bus Industries for $670 million, ending months of speculation that a deal was in the works.

Western Star operations will be rolled into Freightliner’s Sterling Trucks division, while the Orion bus business will come under Freightliner’s specialty vehicle arm that includes Thomas Built Buses, Freightliner president Jim Hebe announced on July 19, in a conference call with the media.

Western Star has manufacturing facilities in Kelowna, B.C. and North Charleston, S.C., while Orion supplies transit buses from Mississauga, Ont. and Oriskany, N.Y.

In terms of the product line, the Western Star name will remain under the Sterling franchise, Hebe said. “It is our intention that we will continue with the Western Star brand, and the Western Star truck line will continue in the market.” The Western Star-badged trucks will fill a heavy vocational role and include a long-haul highway truck model. “In parenthesis,” Hebe said, “look out Peterbilt.”

“We intend also to use the Western Star heavy vocational platform as a base for a heavy-duty platform for Freightliner,” he added.

Western Star has 3,100 employees and 214 dealers, and in 1999 built 2,117 Class 8 trucks in Canada.

Although there are no plans to reduce production at the existing plant in Kelowna, B.C. (it’s currently been scaled back to 20 trucks per day), Hebe said it’s unknown whether Freightliner will continue with Western Star’s plans to build a new, larger facility in the region. “We are completely neutral in regard to that new plant,” he said.

The B.C. government had invested $60 million in Western Star with the promise of a new plant in the region. With the purchase, however, B.C. will convert $20 million of its preferred shares to common shares, and the remaining $40 million investment will be redeemed under terms of the agreement for a “very handsome return”, Hebe added.

“We’ve decided to exercise our right to withdraw our investment and to get all of the money back,” B.C. government spokeswoman Lucy Stephenson said of the deal.

Although the province had also committed to investing $25 million to train Western Star employees over a 10-year period, that deal is now void with the change in ownership, she said. The province, however, has already paid its $2.5-million installment for this year.

Employees in Kelowna are being invited to a “town hall” meeting with Hebe on July 20, said Western Star spokesman Doug Shand. Since a summer shutdown isn’t scheduled to end until July 24, the 1,250 employees were being notified of the change through their local newspaper and radio broadcasts.

“I guess they’re a little mystified as they read (about the deal) and try to understand what’s happening from an employee point of view,” Shand said of the mood in Kelowna. “We certainly think it’s positive.”

DaimlerChrysler’s other B.C. holdings include MTU Maintenance (a Canadian Airlines maintenance facility) and joint venture with Ford in Vancouver-based Ballard Power Systems.

Both Freightliner’s and Western Star’s board of directors have approved the sale, although the deal still requires the approval of 75 per cent of Western Star’s shareholders. A shareholder meeting to approve the transaction is scheduled for September.

Western Star chairman, chief executive officer and president Terry Peabody will purchase Western Star’s Australian operations, including MAN Australia, for an estimated $39 million, with the assumption of $36 million in debt. But the deal doesn’t include one of the oldest truck makers in the world – U.K.-based ERF – which Western Star sold earlier this year to European-based MAN.

Western Star International Pte Limited is indirectly controlled by two Peabody Family Trusts, which hold approximately 6 million shares – or 42 per cent of the issued and outstanding shares – and it will vote in favor of the sale to Freightliner.

The announcement follows five months of intense negotiations and ends several months of speculation that Freightliner had been courting Western Star. The rumors culminated with a day-long hold on the trading of Western Star stock on June 20, when stock values leapt 19 per cent amid speculation of a takeover bid.

“This transaction provides a tremendous opportunity for Western Star employees, customers and shareholders,” Peabody said in a release. “The board of directors accepted this deal after considerable deliberation and consideration.”

Freightliner is continuing to study a deal that Western Star struck with Dina to build the medium-duty Solar Series of trucks. “As soon as we get into this, we will have discussions with Dina,” Hebe said. Freightliner and Sterling are already aggressively pursuing the medium-duty market with Business Class and Acterra truck lines, respectively.

But the deal answers some immediate production-related questions at Freightliner.

Production capacity was a growing concern for the manufacturer, which wants to introduce several new products in the next 18 to 24 months, including a heavy-duty pickup line. Freightliner only recently announced plans to introduce the Class 2-4 Sprinter vans in North America.

“This, to some extent, solves what was becoming an issue for us,” Hebe said.

Western Star’s new 460,000-square-foot North Charleston plant that was opened in March has a capacity to build 20,000 trucks per year.

The remaining question involves the current dealer organization, which will be merged with Sterling’s.

“Western Star’s market share has not been limited by its production. Western Star’s market share has been limited by its distribution,” Hebe said of the advantages of a merger into the Sterling organization.

Hebe expects to retain 90 per cent of the existing Western Star dealers, although the situation doesn’t bode well for Western Star dealers who want to continue to carry more than one brand. About 40 per cent of the existing dealers also sell other vehicle lines.

“We don’t dual well,” Hebe said of Freightliner’s dealership organization. “It will be a cold day in Hades before we start offering Sterling (trucks) in dealerships that have somebody else’s name on it.”

Economically, it was the best possible time for a deal, despite a slumping truck market, he added.

“Western Star is the last of what we would call the minor major players in the heavy truck business that will be available in North America,” Hebe said. “It became increasingly important for us to take advantage of the timing, as it exists right now, to acquire Western Star.” n

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