Goodyear, Sumitomo move on after breakup

AKRON—Goodyear and Sumitomo Rubber Industries Ltd. are moving ahead with plans to extend their reach and grow.

They're just doing it without relying on a global partnership with one another that lasted 16 years, as the two firms agreed to dissolve their global business alliance June 4.

As part of the deal, Goodyear will pay SRI $271 million to balance out the financial end of the transaction initially and repay $55 million in debt owed SRI within three years, a Good-year spokesman said.

The agreement resolves a 15-month dispute between the firms that involved charges and countercharges.

Goodyear alleged SRI had engaged in “anticompetitive conduct in violation of applicable antitrust laws” and SRI subsequently filed counterclaims, alleging “various breaches of the global alliance agreements” by Goodyear.

Both companies said this agreement will allow them to avoid the cost and uncertainty of arbitration to resolve their differences. The alliance primarily consisted of four joint ventures, one each in North America and Europe and two in Japan.

Through the agreement, Goodyear secures the rights to sell Dunlop-brand consumer and commercial tires in the replacement markets in North America and the replacement and original equipment markets throughout most of Europe.

Sumitomo will acquire Goodyear's 75 percent interest in Goodyear Dunlop Tires North America Ltd., including the venture's factory in Tonawanda, N.Y., along with rights to sell Dunlop-brand tires to Japanese vehicle makers' subsidiaries in the U.S., Canada and Mexico.

It also assumes exclusive rights to the Dunlop-brand motorcycle tires in North America.

“While we have derived value from the alliance over the last 16 years, Goodyear is well positioned today to pursue our strategy on our own,” Richard Kramer, Goodyear chairman and CEO, said in a prepared statement. “This successful resolution increases our flexibility to grow profitably as we continue to focus on delivering strong performance and sustainable economic value.

“We are committed to a smooth and orderly transition that will be seamless to our customers and consumers in North America, Europe and Japan.”

Goodyear said the transaction will not impact its 2015 and 2016 financial targets or capital allocation plan. The outlay is included in the approximately $600 million designated for restructurings under the capital allocation plan.

Sumitomo said the agreement will give it a “greater degree of autonomy” over its business, including OE tire business with Japanese car makers and motorcycle tires globally except for Europe, and it will allow the tire maker to establish manufacturing and research and development facilities in North America and Europe, where it goes to market primarily under the Falken brand.

Sumitomo noted the deal will help it build the Falken brand into a stronger, more global brand. It said the “impact of the dissolution of the alliance agreement and the joint ventures on SRI's financials is under review and will be announced once it is identified.”

Goodyear and SRI formed the global alliance in 1999. At that time, Goodyear paid Sumitomo $936 million to settle the difference between the value of the respective businesses being consolidated and the agreed-upon shareholding ratios.

Other aspects of the current agreement include:

• Goodyear will retain exclusive rights to sell Dunlop-brand tires to non-Japanese vehicle makers in North America.

• Goodyear will acquire SRI's 25 percent interest in Goodyear Dunlop Tires Europe B.V., including six former Dunlop Tyre tire plants, in Amiens and Mont-lucon, France; and Furstenwalde, Ha-nau, Riesa and Wittlich, Germany.

• Goodyear's Dunlop-brand rights in Europe cover motorcycle and racing tires in addition to consumer and commercial tires.

• SRI will obtain exclusive rights to sell Dunlop-brand tires in certain countries that were previously non-exclusive under the global alliance, including Russia, Turkey and certain countries in Africa. SRI has a plant under construction in Turkey and in late 2013 acquired the Dunlop-brand rights throughout most of Africa and the Middle East from Apollo Tyres Ltd.

• Goodyear will acquire SRI's 75 percent interest in Nippon Goodyear Ltd., which serves the replacement market in Japan with Goodyear-brand tires.

• SRI will acquire Goodyear's 25 percent interest in Dunlop Goodyear Tires Ltd., which serves the OE market in Japan with Goodyear- and Dunlop-brand tires.

• Goodyear will regain exclusive rights to serve the Japanese replacement and OE markets with Goodyear-brand tires, a business channel Good-year noted has been under Sumitomo's control for the past 16 years.

• SRI will continue to have exclusive rights to sell Dunlop-brand tires in the Japanese replacement and OE markets.

The SRI Global Purchasing Co. (SRI 20 percent/Goodyear 80 percent) and Goodyear—SRI Global Technology L.L.C. (SRI 49 percent/Goodyear 51 percent) will be dissolved as part of the agreement.

As a result of the pact, Goodyear will sell its 3.4 million shares of SRI common stock, which could result in a gain of roughly $59 million, based on current share prices.

Goodyear said it expects the transaction to be accretive to its earnings beginning in the first quarter of 2016.

Based on the company's 2015 operating plan, Goodyear said it should realize an annual benefit to adjusted net income of approximately $40 million to $50 million, or 15 to 18 cents per share.

The transaction is subject to customary closing conditions, including the receipt of regulatory approvals as well as SRI's completion of a labor agreement with the United Steelworkers union for the Tonawanda plant, the companies said.

Goodyear investors should view the transaction favorably, according to a report issued by KeyBanc Capital Markets analyst Brent D. Hoselton.

Five reasons were listed in the report:

• The deal will be accretive to 2016's earnings per share by between 15 to 18 cents per share, driven primarily by the elimination of a minority interest in Goodyear Dunlop Tires Europe. In addition, Goodyear indicated no impact on its 2015-16 financial targets.

• Goodyear's $271 million to balance out the financial end of the transaction “appears fair and generally in line to slightly below a wide range of investor expectations we have recently heard.”

• The Akron tire maker's $600 million designated for restructurings previously put in place covers the $271 million cash outlay and “the $55 million of debt repayment to SRI within three years of closing appears to be mostly offset by Goodyear's expected sale of 3.4 million shares of SRI stock.”

• Goodyear will gain from the Japanese joint venture transactions with the buyout of SRI's 75 percent stake in Nippon Goodyear Ltd., which serves the replacement market with the Goodyear brand, and the company “will regain exclusive rights to serve the Japanese replacement and original equipment markets with Goodyear brand tires, while SRI gets Goodyear's 25 percent Dunlop stake and maintains the exclusive brand rights.”

• The pact resolves the arbitration process between the firms, which will reduce associated cost and uncertainty.