Goodyear-Cooper Tire deal 'a transactional milestone'

AKRON—When Goodyear made its initial inquiry—combining the top two U.S.-based tire manufacturers, situated 132 miles apart, both with a century of history behind them—executives at Cooper Tire & Rubber Co. said they felt comfortable with their company's current trajectory.

"We were feeling quite good about the strategy and direction of the company," said Bradley Hughes, Cooper CEO and president.

Once serious talks commenced, Hughes said it became clear Goodyear's offer to purchase Cooper for $2.5 billion in a cash and stock deal was the right one for two reasons.

"Ultimately, we needed to represent our shareholders, and Goodyear, first of all, presented a very compelling offer for the company," Hughes said, "and secondly, very compelling strategic logic ... really positions the combined entity to be successful going forward."

The pending acquisition—bringing together Akron-based Goodyear, No. 3 in global sales with $13.7 billion in 2019, with Findlay, Ohio-based Cooper, No. 13 globally with $2.7 billion—was announced Feb. 22, before U.S. markets opened.

The deal, expected to close in the second half of the year, will leave Goodyear shareholders with about 84 percent of the combined company and Cooper shareholders 16 percent.

The combined company expects to generate $17.5 billion in sales, narrowing the gap between Goodyear and the world's top two tire makers, No. 1 Michelin ($25 billion) and No. 2 Bridgestone Corp. ($24 billion plus). The merger also would bring to 42 the number of Goodyear tire plants, including nine that Cooper operates.

Combined, Goodyear (No. 3) and Cooper (No. 5) represent more than $7.1 billion in sales in North America, behind No. 1 Michelin ($8.25 billion) and Bridgestone ($7.85 billion), according to Tire Business calculations.

More than 80 percent of Cooper sales occur in North America, by far the greatest percentage of any major international tire company. By comparison, Goodyear generates about 45 percent of its global revenue from sales in North America.

In current dollars, this marks the largest purchase of a tire maker since 2016, when China National Chemical Corp. Ltd. acquired majority control of Pirelli & C. S.p.A. for $6.9 billion. The largest similar transaction last occurred in 1988, when Bridgestone Corp. acquired Firestone Tire & Rubber Co. for $2.6 billion, or $5.8 billion, adjusted for inflation.

Richard Kramer, Goodyear chairman, CEO and president, called the move a "transactional milestone" in the rich history of both companies.

"We're very excited and confident that this combination enables us to have enhanced service to our customers and consumers while delivering value to our shareholders," Kramer said, noting the companies have similar work cultures. "The deal simply makes sense for both of us and, most importantly, for shareholders as well."

Kramer laid out two reasons the deal strengthens Goodyear:

Increased global strength and leadership, especially in China, where Goodyear nearly will double its presence;

• An enhanced portfolio of products, in which Cooper's brands—Cooper, Mastercraft, Starfire, Mickey Thompson among them—bolster Goodyear across "the value spectrum," particularly in the burgeoning and "highly profitable" light truck and SUV segments.

"From our perspective, it gives us a stronger financial foundation, with greater resources, an improved balance sheet," Kramer said. "It gives an opportunity to grow, and it gives us increased opportunities all around as a company to think about investing more into the future."

The move not only provides "a strong and immediate" boost for Cooper shareholders, Hughes said, but it also creates a "stronger, more competitive force" within the industry.

"We feel like it recognizes the great progress we've been making as a company, transforming into a consumer-facing company with a strong manufacturing footprint, which was only made possible by the great work of Cooper team around the globe," Hughes said.

"It's a global industry with a lot of competitors, a lot of new technology coming to the market, and bringing the two teams, the two companies, the two strategies together, they will emerge as stronger entity.

"This combination will be effective early. The cultural similarities and value systems of the two teams will allow integration process to happen more efficiently, more effectively, and it's going to create a much easier path to a very successful shared future."

Kramer noted that combing Cooper's activities should yield $165 million in "run-rate" savings through synergies over a two-year period.

Those saving synergies will be realized in selling, general and administrative expenses; research and development; distribution and warehousing; and procurement.

At the same time, Goodyear said it expects to book expenses of $150 million to $175 million in order to achieve those synergies.

Potential synergies in leveraging the respective manufacturing assets are still to be determined. Kramer said no plant closings or personnel layoffs are expected, although the combined company will operate out of a single headquarters, in Akron.

"Our intention is, as we work through integration, to understand better how we can best utilize and optimize the capacity of the two combined footprints," Kramer said. "That will be a key focus for us going forward."

A key element of the manufacturing piece is Goodyear's acquisition of Cooper's 10 factories (nine tire plants and a tire components unit). Annual global production capacity for the combined operation will be 200 million units, including 64 million in North America.

Cooper operates two plants in China, significantly boosting opportunity there for OEM business in a revamped Goodyear.

"Between the U.S. and China, that's where the growth and the lion's share of the global tire industry sits," Kramer said. "Clearly, a real benefit for us going forward."

Another benefit for Goodyear is a broadened portfolio. While Kramer said the company will continue to market Goodyear as its premium brand, Cooper's array of brands will complement Goodyear's lower-tier offerings, which now include Kelly and Dunlop.

"Given the industry trends in the U.S. market, we believe there are significant advantages to offering a more comprehensive portfolio," Kramer told investors on the morning of the sale. "This robust suite of brands will allow us to have an unmatched product offering across the entire value spectrum ensuring we can meet the needs of all customers and consumers."

Kramer said Cooper's work in upgrading its lineup, particularly the Mastercraft brand, will enhance the Goodyear LT/SUV portfolio.

"There's room for both the Goodyear premium brand and there's absolutely room for some of the key brands that come with this combination," Kramer said.

Questions remain about the distribution network. Currently, TireHub L.L.C., a wholesale operation owned 50/50 by Goodyear and Bridgestone Americas Inc., serves as those tire makers' main distributor. Goodyear also operates 569 retail stores in the U.S., and has minority ownership stakes in three dealerships in Canada, comprising nearly 200 points of sale.

"Creating broader distribution for Cooper's replacement tires through Goodyear's branded retail stores and our high-growth, direct-to-consumer channels, such as our e-commerce platform and mobile installation business, will benefit volume and increase Cooper's brand awareness with consumers," Kramer told investors. "We also believe we can capture more value of Cooper's products by leveraging TireHub and our aligned third-party distribution network."

It also remains unclear how the commercial tire sector might emerge in the revamped operation. Both CEOs, though, expressed excitement for combining each company's efforts in sustainability mobility.

"We're developing intelligent tires that can be integrated into autonomous driving systems, and we're rethinking the materials we used to create more sustainable products along the way," Kramer said. "Bringing our companies together will further improve the scale needed to support this innovation."

In a letter sent to employees on the morning of the sale, Hughes said Cooper enters the agreement "from a position of strength," and he lauded their efforts in transforming Cooper "into a consumer-driven company that we were approached by Goodyear."

As the integration process begins and federal regulators review the deal—analysts say there's no reason to believe it won't be approved—each company will continue to operate as a separate entity.

It will, however, bring Cooper full circle. The company was founded in Akron in 1914 as the M & M Manufacturing Co. by John F. Schaefer and Claude E. Hart, who were related by marriage. It originally manufactured tire patches, tire cement and tire repair kits, before purchasing the Giant Tire & Rubber Co. of Akron, a tire rebuilding business, in 1920.

In 1922, Cooper moved to Findlay, merged with Cooper Corp. in 1930 and adopted the Cooper Tire & Rubber name in 1946.

"I believe this transaction is the right next step for Cooper at the right time," Hughes wrote to employees. "The idea of change can be difficult, and it is important that you take the time to learn about this transaction and process the information in your own way. There is no rush."

Goodyear, meanwhile, was founded in Akron in 1898 by Frank Seiberling, who named the company in honor of Charles Goodyear, the man credited with discovering vulcanization.

"We believe this transaction will create significant value for all our stakeholders, our shareholders, our customers, our employees, and of course, the communities in which we operate," Kramer said.