OVERVIEW OF THE DEAL
On Monday the 22nd of February, Goodyear Tire & Rubber, world’s third largest producer of tyres, announced that it will acquire its competitor Cooper Tire & Rubber, world’s 13th tire manufacturer, for $2.8 billion.
This announcement comes after a difficult year for the tire industry, which is in the process of being restructured after a drop in tire sales linked with the drop of car sales in 2020. This acquisition is expected to create growth opportunities for Goodyear, which is trying to gain some market shares from its two main competitors, Michelin and Bridgestone.
Company Details: Acquirer – Goodyear Tire and Rubber
Founded: 1898
Headquarters: Akron, Ohio
CEO: Richard J. Kramer
Status: Public - Listed
Number of Employees: 64,000
Market Cap: $4.26bn
Revenue: $14.7bn (2019)
EBITDA: $1.6bn (2019)
Goodyear is the third largest tire manufacturer in the world and the first in the United States. It provides tires and rubber-based equipment for the automotive or aeronautics sectors. The company has a strong international presence with installations across 22 countries around the world, even if it generates most of its sales (53,7%) in the Americas. The remaining amount of its sales is split between EMEA (31,9%) and Asia Pacific (14,3%). In 2020, the Covid-19 pandemic negatively affected Goodyear’s sales volumes, resulting in an estimated net income loss of $1.3 billion even if the company is on the road to recovery thanks to the rebound in demand in the industry.
Company Details: Target – SightGlass Vision
Founded: 1914
Headquarters: Findlay, Ohio, United States
CEO: Roy V. Armes
Status: Public
Number of Employees: 10,000
Market Cap: $2.921bn
Revenue: $2.52bn
EBITDA: $390m
Cooper Tire & Rubber Company is the parent company of a global family of companies that specializes in the design, manufacture, marketing and sale of passenger car, light truck, medium truck, motorcycle and racing tires. Cooper's headquarters is in Findlay, Ohio, with manufacturing, sales, distribution, technical and design operations within its family of companies located in 15 countries around the world.
SYNERGIES
1. Targeted synergies
We expect multiple synergies from this deal. This deal will significantly boost the global presence of Goodyear by doubling its market share in China, increasing its lead at the top in USA & growing its presence in other North American markets. This combined bigger entity with bigger geographic footprint will result in having a greater negotiating power with suppliers. Goodyear also expects to save $165 million in cost synergies within 2 years of the acquisition. Most of this will come from overlapping corporate functions & operating efficiencies. Going into the future, this acquisition will provide Goodyear more flexibility to invest into R&D and thus accelerate the process of bringing new technologies to the market. Lastly, this deal aims at making this bigger entity a one stop solution for the retailers & distributors by combining two complementary yet exhaustive brand portfolios.
2. Synergies analysis
The synergies will have a positive effect on the growth of Goodyear. In the short term, it will strengthen its presence on the market of tyres in the world and in particular in emerging markets such as China, where the synergies are expected to double the presence of Goodyear and where the tyre market is growing at a 6% annual rate. The synergies will also cut costs, since Goodyear will need only one of each duplicate corporate function that existed previously in Goodyear and in Cooper.
The synergies are also expected to have a beneficial effect in the long term. Indeed, the complementarity between Goodyear’s and Cooper’s products (Goodyear having a strong expertise in car tyres and Cooper in 4x4 and light trucks) will make the combined company able to provide premium tyres to a wider range of customers. This will strengthen its capacity to compete with its two major competitors Michelin ($25 billion turnover in 2019) and Bridgestone ($24 billion turnover), who are already selling all sorts of tyre, from the car tyres to truck or farm tyres.
Moreover, the synergies will enable the two companies to improve their innovative power. The meeting of the know-how of the two companies will make them able to produce better tyres and to produce them with fewer means, while also enabling them to innovate in the way they sell tyres. Indeed, the tyre industry is entering what is called the functionality economy, which is an economic model based on the sale of a service based on a product rather than the sale of a product. For example, Michelin started a new business model where it rents its tires to road hauliers and takes care of their maintenance and replacement, instead of directly selling tyres. We can expect the synergies of Goodyear’s and Cooper’s networks of sellers to adapt to these new needs of the customers.
This new business model that the combined company could develop would also include it in a CSR (corporate social responsibility) strategy. Indeed, critics are voices against the tire industry, since the production of tires needs rubber that comes from rubber trees. Plantations of rubber trees requires deforestation, which is becoming a threat in some countries of Asia such as Cambodia, Vietnam or Malaysia. Taking care of the tires so that they can last longer could reduce the use of rubber, while not necessarily reducing the revenues of the tire manufacturers: the revenues from the service of maintenance of the tires could compensate the loss of revenues due to the longer life duration of the tires. Moreover, cars and trucks with well-maintained tires use less oil than those with used tires. Therefore, this new business model that could come from the synergies could be a great opportunity for the combined company to earn greater revenues while including itself in a CSR strategy.
RISKS AND UNCERTAINTIES
A first risk for this merger is the overlapping of the tyre production of Goodyear and Cooper. Indeed, Goodyear and Cooper both produce tyres for car, 4x4 and light trucks. Though this is an opportunity for them to gain knowledge from each other, it is also a threat, since they could compete internally to choose the production sites or the right way to manufacture the tyres. Thus, the similarity of the production of these two companies is as much a risk as it is an opportunity.
Another risk that could hinder the growth expectances of the combined company is the drop in car sales due to the pandemic. Because of uncertainty about the future, households no longer buy durable goods, including cars: the global car sales fell by 15% from 2019 to 2020. In addition, the generalization of working from home could reduce the use of cars, and therefore the use of tyres. For these reasons, the growth expected from the acquisition may not be as high as expected.
FINANCIAL CONSEQUENCES
As this merger will be mainly paid with cash (77%), the control of Goodyear over Cooper will be very important. As a matter of fact, after our analysis, Cooper former shareholders will only own 16% of the new group.
In terms of leverage, Goodyear should really benefit from this operation, despite the debt issued to buy Cooper’s shares. This is good news as the American company’s ratings had very recently been downgraded from Ba2 to Ba3 by Moody’s due to its net debt to EBITDA ratio of 3.6x. This merger will allow the company to reach a ratio of 2.9x - a 19% decrease - which should be positively welcomed by the market. Yet, this target indebtedness ratio remains quite dependent on the completion of the €165 million expected synergies.
The American company will also benefit from a very strong Earnings per Share accretion - it is expected to double within the next 3 years, when synergies will be in place. This very optimistic projection is based on a €118.8 million post-tax synergies generated by the deal. Another important factor in the realization of this strong increase in the EPS level is the majority of the transaction being paid in cash and not shares.
IS THE DEAL FAIRLY PRICED?
With a transaction size of approximately $2.5 billion and EBITDA of $402 million, the deal's EV/EBITDA multiple is 6.38. If considering that both the EV/EBITDA medians of precedent transactions and of trading comparables are higher than 6.38, being them 8.26 and 8.51, respectively, we can conclude that the deal's multiple is lower than what has been observed in the industry. For such analysis, the trading comparables included Michelin, Hankook Tire & Technology, MRF, Cheng Shin Rubber Industry, Sumitomo Rubber Industry, Toyo Tire, Apollo Tyres, Kumho Tire, and Nexen Tire; as for precedent transactions, some of deals include Pirelli and ChemChina, Multistrada Arah Sarana and Michelin, Multistrada and Northstar Equity Partners, among others.
Yet, if comparing the deal's expected synergies with the premium paid for the deal, it can be said that the synergies are expected to be much higher than the premium paid. While the synergies' valuation is estimated to be $1.4 billion (by multiplying the trading comparables median with the expected synergies of $165 million), the premium identified was worth $534 million. In case all synergies are realized, the premium paid could be considered low, since the value would be recovered by the synergies. However, since synergies are an estimated guess, the synergies valuation can be misleading and the premium paid could end up being higher than the synergies. Nevertheless, since the synergies valuation is much higher than the premium paid, we believe that the synergies realized will still be higher than the premium.
Even though the expected synergies exceed the premium paid, we believe that the deal’s price does not resonate with current market trends, mainly because of the multiple comparison. Cooper's strong balance sheet, the current strong equity bull market for M&A activity and low cost and high availability of debt financing can be considered factors that would justify a higher price than the one established. In addition, Cooper has recently fully exited its targeted private label portion of the business and built up new customer relationships and channels, which would benefit Goodyear and, therefore, could also justify a price increase. Last, the tire industry is experiencing a dynamic trade environment with increased complexity, leading tiremakers to increase domestic production capacity due to lack of available domestic manufacturing sources. Hence the merger would be beneficial to both parties since they would be able to increase their production capacity. Therefore, it is believed that such a deal occurring at such a moment should have a higher price than precedent transactions and trading comparables.
The belief that the deal might have been lowly priced can be confirmed by the law office Brodsky & Smith, LLC, who is investigating a potential breach of fiduciary duty and other violations, since, according to the agreement, Cooper Tire shareholders will receive $41.75 per share in cash and a fixed exchange ratio of 0.907 shares of Goodyear common stock per Cooper Tire share. However, based on Goodyear's closing stock price on February 19, 2021, the last trading day prior to the announcement, the implied cash and stock consideration to be received by Cooper Tire shareholders is $54.36 per share. Therefore, it is perceived that the deal might have been poorly priced.
CONCLUSION
Goodyear’s acquisition of Cooper is expected to close in the second half of 2021. There should not be any obstacle to the completion of the deal, which will bring new growth opportunities for these companies. The reaction of the market (Cooper shares surged 27% on the news of the acquisition) shows that the deal has been accepted by the shareholder. The question now is to see the reaction of Goodyear’s competitors, in an industry heavily affected by the pandemic