By Christopher Shim, Joshua Ooi, and Rohan Shah (University of Cambridge), Kévin Insixiengmay, Martín Palomar, Olivier Baverez, Alexis Bernet, and André Assouline (HEC Paris)
Overview of the deal
Acquirer: Goodyear Tire & Rubber
Target: Cooper Tire & Rubber Company
Total Transaction Size: $2.8 billion
Closed date: 22/02/2021
Target advisor: Goldman Sachs
Acquirer advisor: Lazard, JP Morgan
Goodyear is to purchase Cooper Tire & Rubber Company for $2.8B, with the aim of strengthening its US presence through market-leading retail channels and supply chain management. The acquisition will improve Goodyear’s product offering for the light truck and SUV market segments. The acquirer expects ~$165M in run-rate cost synergies in addition to Goodyear’s tax attributes that will allow for the additional free cash flow for the third-largest tyre manufacturer by market share, after Bridgestone (Japan) and Michelin (France). The transaction is to be financed through a cash portion as well as a bridge financing facility from JP Morgan.
“The addition of Cooper’s complementary tire product portfolio and highly capable manufacturing assets, coupled with Goodyear’s technology and industry leading distribution, provides the combined company with opportunities for improved cost efficiency and a broader offering for both companies’ retailer networks. We are confident this combination will enable us to provide enhanced service for our customers and consumers while delivering value for shareholders.” - Richard J. Kramer, CEO (Goodyear)
Company Details: (Acquirer - Goodyear)
Trading publicly since 1927 as GT, Goodyear is the third-largest tire manufacturer in the world and the largest in the United States. It provides tires and rubber-based equipment for the automotive and aeronautics sectors. In 2020, the Covid-19 pandemic negatively affected Goodyear’s sales volume, resulting in an estimated net income loss of $1.3B. Although the company is now back on the road to recovery thanks to the rebound in demand in the industry.
Founded in 1898, headquartered in Akron, Ohio (USA)
CEO: Richard J. Kramer
Number of employees: 64,000
Market Cap: $3.84B (as of 25/03/2021)
LTM Revenue: $12.32B
LTM EBITDA: $660M
LTM EV/Revenue: 0.66x
LTM EV/EBITDA: 12.49x
Company Details: (Target - Cooper Tires)
Founded in 1914, the Copper Tire & Rubber Company designs, manufactures, markets, and sells replacement tires in North America, Latin America, Europe, and Asia. Its products include tire retread materials, as well as passenger car, light truck, truck and bus radial (TBR), motorcycle, and racing tires. The company’s customers include independent tire dealers, wholesale distributors, regional and national retail tire chains, and it even has three wholly-owned retail stores for direct sales to certain clients.
Founded in 1914, headquartered in Findlay, Ohio (USA)
CEO: Roy V. Armes
Number of employees: 9,839
Market Cap: $2.15B (as of 18/02/2021)
LTM Revenue: $2.52B
LTM EBITDA: $373.2M
LTM EV/Revenue: 0.79x
LTM EV/EBITDA: 5.4x
Projections and Assumptions
The short-term consequences are that both parties primarily benefit from this arrangement. The initial benefits will emerge from combining research, corporate functions, and procurement. Furthermore, both companies view opportunities to leverage production systems which may lead to streamlining and trimming of manufacturing jobs and plants. Furthermore, in the short-term, industry experts predict that there will be increased auto demand towards the end of 2021 fuelled by COVID-19 vaccine rollouts in the United States, China, and Europe, very low interest rates, and significant consumer savings incurred during the pandemic lockdowns. This doubles Goodyear’s China presence and expands distribution for Cooper replacement tires through its network of 2,500 retail stores in China. The United States and China, the two largest tyre markets in the world, account for one-third of industry volume worldwide and thus is significant in itself.
Particularly for Goodyear, this acquisition will give it more than 50 factories, annual revenue of $17.5 billion, 72,000 employees, and Cooper tyre’s brands such as Mastercraft. This deal is expected to immediately strengthen Goodyear’s per-share earnings and Goodyear expects to fund the cash portion of the deal via debt financing. When the deal was announced on Monday 22 February 2021, Cooper shares increased by 24% to $54.31 in New York while Goodyear’s stock price increased by 7.5%. Overall, the deal is expected to deliver run-rate cost synergies of approximately $165 million in two years after closing.
There are significant long-term upsides from this acquisition, which will make the combined company the largest brand in the US, with the 3rd highest global revenues in tyre sales. This will also provide the size and scale to expand further into China, a key emerging market for the tyre industry, with an expected 6% CAGR between 2020 and 2024 in the region. This is currently the same % of total global tyre volume as the US (18% of the market). Furthermore, in the long run, there are opportunities to create additional value from manufacturing and distribution. Capital and operating efficiency can be optimised across the combined consumer and commercial plants, utilising Goodyear’s strength in the US and Europe combined with Cooper Tires’ exposure in China to increase the supply of high-value tyres.
Additional growth opportunities through the broader distribution of Cooper’s replacement tyres from Goodyear-branded retail stores as well as enhancing product offerings for Goodyear’s aligned distributor network will further increase the upside for the company over the next 3-5 years. Overall, these long-term upsides will place the combined company at the forefront of an evolving industry landscape, leveraging Goodyear’s leading technology position with a combined comprehensive portfolio of brands and strengthened network as well as crucial short and long-term financial benefits.
Risks and Uncertainties
A first risk for this merger is the overlapping of the tire production of Goodyear and Cooper. Indeed, Goodyear and Cooper both produce tires for regular cars, 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 tires. Thus, the similarity of the production of these two companies is as much a risk as it is an advantage.
Another risk that could hinder the growth expectations of the combined company is the drop in car sales due to the pandemic. The pandemic has brought uncertainty to households' short and long-term financial outlook, hence they are less prone to buy durable goods, most notably cars: global car sales in 2020 fell 15% from their 2019 level. In addition, the generalized trend of working from home could reduce the use of cars, and therefore the use of tires also. For these reasons, the presumed growth that is to come from the acquisition may not be as high as expected.
“Most notably, our manufacturing teams are working to reduce our conversion costs. Our European restructuring program will significantly decrease our cost structure in the region as we curtail production of tires for the declining less profitable segments of the market” - (Richard J. Kramer, CEO of Goodyear Tire and Rubber)