FAIRLAWN, Ohio—ContiTech A.G. is on course to more than double the size of its rubber hose and belt operation in North America while significantly boosting its overall presence across the globe.
Continental A.G., ContiTech's parent, opened the door to that possibility when it announced Feb. 10 that it had agreed to buy major competitor Veyance Technologies Inc. from the Carlyle Group, a private equity firm, for about $1.91 billion.
That is roughly $440 million more than the amount Carlyle paid for Veyance when it purchased the business in 2007.
Expected to close late in the third quarter or the beginning of the fourth quarter, the transaction, which will be financed from cash and available credit lines, is subject to the approval of antitrust authorities.
But once Conti gets the nod, the deal will pair two of the largest belt and hose makers in the world and give ContiTech much larger air spring, rubber track and power transmission belt businesses.
That is especially true in the U.S. and other parts of the Americas, where Veyance has a major foothold. It generates about half its $2 billion in annual sales in the U.S. and has a strong presence in Latin America, where it pulls in about 16 percent of its revenues, a ContiTech spokesman said.
ContiTech is a big player in Europe, where it garners about 66 percent of its overall sales, which were about $5.3 billion in 2013. The firm is a far smaller player in North America.
It is important to have balance for the stability of a company, said Heinz-Gerhard Wente, CEO of the ContiTech division and a member of Continental's executive board. Bringing Veyance into the fold ties in with ContiTech's growth strategy, he said.
"We're quite pleased with what we've accomplished over the last seven years," said John Hamilton, president and CEO of Veyance since November 2010. Its recent performance, along with its 100 years of success and growth operating as Goodyear Engineered Products, made the company an attractive opportunity for ContiTech, he said.
Once the transaction is finalized, a merged operation will:
• Significantly expand ContiTech's non-automotive segment to 60 percent of its sales, up from 47 percent presently, which follows the firm's strategic plan of creating a better balance between non-automotive and automotive products, according to Wente;
• Give the combined operation pro forma sales of more than $7.3 billion while boosting its work force to 39,000; and
• Enhance ContiTech's global reach into key markets where its presence is limited.
In a conference call from Veyance's headquarters in Fairlawn following the announcement of the acquisition, Wente said Continental as a whole has been striving to create a better split with products outside the automotive sector. About 90 percent of Veyance's revenue comes outside of automotive.
"This does not mean that we do not like the automotive industry," he said, "but we feel that it's quite good to have a certain balance from the automotive industry and in other industries."
Wente said the purchase would help create greater stability for the company and is "a healthy investment" for ContiTech, which, like its parent, is headquartered in Hanover, Germany.
Focusing primarily on the production of conveyor belts, hoses, power transmission belts and air springs, Veyance operates 27 facilities around the world and has a work force of about 9,000.
During the conference call and at a meeting with Veyance employees, Wente made no promises about what the company would keep once the deal was done, stating it was too early to determine if the current management team, work force and factories would remain.
But he noted ContiTech is buying Veyance because it is profitable and on a growth course. His primary message was ContiTech wants to grow the business, not downsize it.
"For growth you need production sites," he said. "So closing plants does not fit into our strategy. Fundamentally, the ongoing optimization of production and logistics operations is part of our everyday business at Continental/ContiTech."
The company has not yet decided on the future of Veyance's headquarters in Fairlawn, but Wente said the site was efficient and functional, and that it could end up becoming the North American headquarters of the merged operation.
"Veyance and ContiTech complement each other geographically, and ContiTech's Conveyor Belt Group and Fluid Technology business units in particular will benefit from an enhanced global presence," Wente said. "The Power Transmission Group and Air Spring Systems (business units) also will achieve positive results from the merger."
The acquisition will be "a really positive thing for our joint customers," said Hamilton. After talking with numerous would-be suitors, he said, "this is the one that's best for our company and our customers."
He said the time was right to move under the umbrella of a rubber and plastics product manufacturer, predicting it was the start of a new, exciting era for the firm and its employees.
ContiTech and Veyance "are a great fit for each other," Hamilton said. "In addition to our complementary geographic and product mix, we bring an organization and culture which delivers on our commitments to customers, employees and our communities."
Once the deal is closed, Wente said ContiTech only will be able to keep the Goodyear Engineered Products brand name for a limited time. Veyance, which was called Goodyear Engineered Products while it was under Goodyear's wing, has used the name under a licensing agreement it has had with Goodyear since Carlyle bought the business.
Losing the name won't be a problem, Wente said, because both Continental and ContiTech, as corporate and product brands, are well known by customers in their relevant markets.
Veyance is and has been a very successful player in a number of markets and has a strong economic track record, Wente told the firm's employees. "In some areas, it is more profitable than ContiTech. We can learn something from Veyance there. That's why I am confident that we can be even better together.
"We expect the markets to remain as competitive as ever. The customers will respond positively, we think, because they should benefit from our broader combined product portfolio."
Bruce Meyer, Rubber & Plastics News staff, contributed to this report.