Detroit Diesel sees savings from OMC deal

Detroit Diesel to Buy Outboard

Detroit Diesel sees savings from OMC deal

Wednesday July  9, 1997
By David Lawder

DETROIT, July 9 (Reuter) - Detroit Diesel Corp said Wednesday it expects to reduce Outboard Marine Corp's pre-tax operating costs by at least $27 million during its first year of ownership of the marine engine and boat maker.

Detroit Diesel's top executives said in a conference call from New York, however, that the cost reduction targets do not include savings achievable from Outboard Marine's money-losing boat business.

Detroit Diesel Vice Chairman Timothy Lieuliette said the deal will be ``accretive from the get-go'' for Detroit Diesel shareholders.

He estimated the combined companies' 1996 net income at about $1.25 a share, compared with $1.17 for Detroit Diesel alone. Had Outboard Marine's boat business broken even, he said the combined earnings would have been $1.63 a share.

In 1998, the deal should be accretive by about five to 10 percent if the problems in the boat business were not addressed and 30 to 40 percent if the boat problems were addressed, he added.

Lieuliette said Detroit Diesel, however, intends to move quickly to stem losses in the boat operations.

``There's a lot of fertile ground in that area. We do believe we can go get some money there, and some of it fairly quickly,'' he added.

Some of the savings on both the engine and boat sides of the business would come from consolidating manufacturing operations. Outboard Marine's engine factories are running at about 70 percent of capacity, while its boat plants are running at only 46 percent of capacity, Lieuliette said.

Other actions would include cutting material costs by reducing the number of Outboard Marine's suppliers. It now has four times as many suppliers as Detroit Diesel has.

In addition, Detroit Diesel Chairman Roger Penske said his Penske Transportation business could help reduce Outboard Marine's $48 million annual freight bill.

Penske said the company might consider divesting the boat business in the future, but added that his first priority is to bring it back to a breakeven position.

``I certainly don't want to indicate that overnight we're going to have a fire sale in the boat business. That would be a big mistake,'' Penske said. ``We think there's some strong brands; there might be some opportunities to partner with other boat companies to take those brands.''

Some plants may be closed, but he would not elaborate on which facilities might be affected. Administrative operations would likely be rationalized, but Lieuliette said the company would maintain a significant presence in Outboard Marine's headquarters city of Waukegan, Ill. Detroit Diesel is based in Detroit, along with other Penske operations.

Baked into the cost of the deal is an incremental reserve of $40 million to $60 million to cover writedowns of certain boat and motor assets and increases in environmental reserves, Lieuliette said.

The deal would significantly change the focus of Detroit Diesel, which was formed in 1988 when Penske acquired General Motors Corp's ailing big truck diesel engine business. It would now have expertise in marine engines ranging from five to 10,000 horsepower.

Detroit Diesel's annual sales would rise to more than $3 billion annually, with Outboard Marine becoming the largest business segment with over $1.2 billion in revenues, including $800 million from engines and $450 million from boats.

Detroit Diesel's heavy truck engine business has about $1 billion in annual revenues, its off-highway diesel engine business about $600 million, its Italian-based automotive diesel engine business about $225 million and its finance subsidiary about $20 million.

A key factor in the deal is Outboard Marine's new FICHT fuel injection technology, which allows the company's two-stroke engines to meet new U.S. emissions standards while boosting fuel economy by about 35 percent.

Two-stroke engines, which burn a mixture of gasoline and oil, have traditionally been favored by outboard engine makers because of their high power-to-weight ratios, but they have had difficulty meeting emissions standards.

``That technology allows the company to maintain and continue two-stroke engines into the next century,'' Lieuliette said. ``It changes the nature of the two-stroke engine.''

Penske said the company would explore applications of other uses of the FICHT technology but wants to concentrate on developing it for the marine market first.

Copyright © 1997 Reuters Limited. 

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