Navistar International Corp. has formed a wide-ranging strategic alliance with Volkswagen Truck & Bus, which includes an equity investment in Navistar by Volkswagen Truck & Bus and framework agreements for strategic technology and supply collaboration and a procurement joint venture.

The partnership will focus on powertrain technology solutions, as well as explore collaboration in all aspects of commercial vehicle development. This enhanced collaboration will enable the alliance to share the costs associated with future vehicle development. The deal will also give Volkswagen’s truck business a foothold in North America and provide Navistar, which has been looking for a partner ever since its heavy-duty diesel truck engine failed to get approval from U.S. regulators in 2010, with a source of new engines.

The procurement joint venture is expected to leverage the purchasing power of Volkswagen Truck & Bus’ three major truck brands: Scania, MAN and Volkswagen Caminhões e Ônibus, in addition to Navistar’s own International® and IC Bus brands, providing Navistar with enhanced global scale.

Navistar expects significant synergies from both the strategic technology collaboration and the procurement joint venture. The company expects the alliance to be accretive beginning in the first year, and for cumulative synergies for Navistar to ramp up to at least USD 500 million over the first five years.

By year five, it expects the alliance will generate annual synergies of at least USD 200 million for Navistar.

“We are very pleased to partner with a global leader who shares our view of the world, in an alliance that will deliver multiple benefits and is consistent with our open-integration strategy,” said Troy Clarke, president and CEO of Navistar.”

“We expect this alliance will create significant global scale, yielding considerable cost savings for both companies,” said Walter Borst, executive vice president and chief financial officer of Navistar. “We believe working collaboratively, the two companies can optimize the capital and engineering expenditures associated with next-generation truck and bus engine development, while providing both Navistar and Volkswagen Truck & Bus with opportunities for substantial procurement savings. This alliance marks another step in Navistar’s journey to be a stronger, more profitable company.”

As part of the alliance, Volkswagen Truck & Bus will acquire 16.2 million newly issued shares in Navistar, representing 16.6% of post-transaction undiluted common stock (or 19.9% of pre-transaction outstanding common stock). Navistar will receive USD 256 million from the equity investment to be used for general corporate purposes.

To underscore the long-term nature of the alliance, Volkswagen Truck & Bus has agreed to hold these shares for a minimum of three years.

The procurement joint venture will help source parts for both companies, providing Navistar and Volkswagen Truck & Bus with greater scale and competitiveness.

The closing of the share purchase agreement implementing the strategic alliance is subject to certain regulatory approvals, the finalisation of the agreements governing the procurement joint venture and the first contract under the technology and supply framework agreement and other customary closing conditions.