Yokohama to broaden off-highway portfolio with Trelleborg Wheel Systems

TRELLEBORG, Sweden—Trelleborg A.B. has agreed to sell its Trelleborg Wheel Systems business to Yokohama Rubber Co. Ltd. for $2.3 billion in a cash and debt-free deal.

It's a transaction in which Japan-based Yokohama sees a chance to make its tire operations less dependent on consumer tires, while Trelleborg sheds an operation it believes is at the top of its valuation, freeing the company up to focus on its non-tire rubber businesses.

The deal comes three months after speculation surfaced that the Japanese tire maker was interested in acquiring the Trelleborg unit, which generated $1.17 billion in revenue last year on the sale of agricultural tires and wheels. The TWS business generated 69 percent of its business in Europe in 2021, followed by North America at 18 percent, Latin America at 6 percent and the rest of the world 7 percent.

It had an earnings before interest and taxes (EBIT) margin of 12 percent on the year, according to data provided by the firms.

The sale, which in effect will double the size of Yokohama Rubber's off-highway tire business, is set for completion "in the latter part of 2022" subject to regulatory approvals, the companies said in separate statements on March 25.

Yokohama Rubber said the acquisition will contribute to the expansion of its off-highway tires (OHT) business, which accounted for $977 million in sales last year and which YRC sees as a "future growth driver."

Moreover, TWS will be counted on to help Yokohama achieve newly established targets, namely improving the sales ratio of consumer and commercial tires, which stands at 2:1. Balancing that ratio will bring sales composition of the group's tire business more in line with the overall market and secure earnings growth.

YRC laid a strong foundation for commercial tire growth in 2016 with the purchase of off-road tire maker Alliance Tire Group. That move alone boosted group sales by around 20 percent.

"We have been seeking growth opportunities for some time to further expand our commercial tire business, and decided to acquire TWS, a leader in the OHT market with a strong presence in Europe," Yokohama told Rubber News in an emailed response to questions. "TWS has a strong market presence in Europe, and further growth can be expected through enhanced sales there."

Trelleborg Wheel Systems, meanwhile, more than doubled in size and substantially increased its profitability in the past several years, buoyed by the acquisition of CGS Holdings (Mitas tires) in mid-2016.

Trelleborg has 10 tire plants in seven countries on three continents—China, Czech Republic, India, Italy, Serbia, Sri Lanka and the U.S.—and four wheel plants in four nations. It also boasts 40 sales offices and employs 6,750 as of the end of 2021.

"TWS has multiple production bases close to its customers in Europe and North America, while Yokohama's main production bases are in Asia, which will enable a more global response," Yokohama said. "We believe it is particularly significant that we can expand our business speedily by producing in North America, where the market is large."

YRC also believes the acquisition will strengthen its brand coverage and service network, contribute to digital transformation, broaden its regional sales network and boost its sales of OE tires.

The move also provides YRC with a more complete brand lineup of tires for agricultural and construction machinery that will cover all brand categories, from basic to standard and premium brands. Yokohama told Rubber News that the Trelleborg brand will join the existing Yokohama brand in the premium segment, while the Mitas brand will be added to the value segment. Cultor will be among brands offered in the budget line.

Yokohama's service network will be strengthened by TWS' proprietary tire maintenance service that provides after-sales service for industrial-use tires at 82 locations in 21 countries. YRC plans to expand that service to agricultural tires.

In the digital area, TWS is developing a remote system for monitoring tire air pressure and temperature. Yokohama Rubber has been developing a similar system, and the two companies will collaborate to develop a more convenient and efficient remote monitoring service.

Adding Trelleborg Wheel also will help strengthen YRC's commercial tire business in terms of product lineup, cost, service and digital transformation, according to a YRC statement.

Of tires manufactured and sold by Trelleborg, agricultural tires account for about 60 percent, industrial tires about 20 percent, with the remainder being tires for construction machinery and motorcycles. The company does not break down its sales by tires versus wheels.

"The addition of TWS' strong sales network in Europe will complement Yokohama Rubber's strengths in Japan, North America and Asia, creating a global network covering all major markets that is expected to propel further growth of the Yokohama Group's OHT business," the Japanese tire maker said. "TWS' addition will also open the door to new customers for Yokohama's OE tires, as about 30 of the 60-some OEMs supplied by TWS would be new customers for Yokohama Rubber."

Changing the makeup of its tire business is part of the Yokohama Transformation 2023 medium-term management plan for fiscal years 2021-23. Yokohama said it expects the consumer side of the tire sector to face such headwinds as a decrease in individual vehicle ownership, while looking for "infrastructure-related vehicles devoted to moving people and goods to increase."

While the TWS acquisition will boost the commercial side of the equation, Yokohama also looks to boost its sale ratio of high value-added tires by increasing sales of its flagship Advan brand for cars and its Geolandar line for SUVs, pickup trucks and winter tires.

After considering different alternatives for TWS, Trelleborg management concluded that divesting at this valuation generates the most shareholder value and creates exciting opportunities going forward. Trelleborg called it an "interesting asset" that drew attention from buyers because it held a top-three position in agricultural tires, a top-two position in material handling applications, and had a strong EBIT track record that could move to the 15-percent range in coming years.

There is a clause in the deal, in fact, where the acquisition price could rise by up to $67 million, depending on the 2022 financial results of TWS, according to Yokohama's news release.

"We wouldn't have sold this business unless we hadn't seen the valuation as attractive," Peter Nilsson, Trelleborg Group president and CEO, said in a March 25 call with media and analysts. "We're not discounting away the business. We simply went into these discussions with a very firm idea on the valuation, and we managed to get it at the level or even slightly above our sales target."

Divesting TWS also will help Trelleborg improve its profitability and make its overall business less cyclical. TWS accounted for 30 percent of group sales, it contributed just 22 percent of EBIT, according to Trelleborg.

"Our ambition is to grow Trelleborg into the world's foremost engineered polymer solutions company in our selected industries," Nilsson said in a statement.

Those industries, he added, include health care and medical, automation, aerospace and specialty industrial applications.

"Moreover, we see a great potential to expand into adjacent products and solutions that complement and strengthen our existing offering," Nilsson said, noting that the divestment created "a more coherent portfolio."

Moving forward, he said in the analyst call, the remaining businesses will have a good deal of business where Trelleborg is the single source, giving it some pricing power.

"We have long-term journeys with all customers where we develop solutions," Nilsson said. "We develop products very much together with our customers. This is the business model we will have going forward."

Without TWS, Trelleborg Sealing Solutions would have accounted for 53 percent of sales and Trelleborg Industrial Solutions 47 percent in 2021. TSS, however, would have generated 68 percent of EBIT, compared to just 32 percent for TIS.

Geographically, 50 percent of sales would be from Europe, 25 percent from North America and 25 percent from Asia and the rest of the world.

In response to an analyst's question, Nilsson said he doesn't see making divestitures within the Trelleborg Industrial Solutions unit as a way to bridge the gap in profitability with the TSS business. Instead it will look at the individual businesses within TIS, and higher margins will "happen with the improving of the business."

The Trelleborg CEO doesn't foresee any difficulty in meeting regulatory approvals, and once the deal closes, the Swedish firm will have a lot stronger balance sheet and be in a positive cash situation.

"We will have a lot of power to increase capital expenditures to organically improve our position and organically grow into more interesting segments, bus also adding the capacity to make more acquisitions," Nilsson told analysts. "That is an area that is exciting for us, and an area (where) we feel we are well-positioned to do good things."

In addition, he said, selling TWS will help boost Trelleborg's sustainability rating in the industry, as the tire unit made up two-thirds of carbon dioxide emissions. That will allow it to immediately meet sustainability objectives for 2025 and keep it on track for its net-zero vision for 2035.

Trelleborg ranked as the No. 9 largest manufacturer globally of non-tire rubber products, with $2.61 billion in 2020 sales, according to Rubber News' latest rankings data.

In North America, Trelleborg Wheel reported revenue of $199 million last year, or 17 percent of the unit's global revenue. The company operates tire factories in Charles City, Iowa, and Spartanburg, S.C.

Yokohama's OHT business generated nearly $493 million in sales in North America last year, up 26 percent over 2020.

Globally, Yokohama ranked as the No. 8 tire maker with $4.35 billion in 2020 sales, according to Rubber News Global Tire Report. Trelleborg ranked No. 33 in tires sales with tire revenue of $765 million.