Kumho takeover implosion isn’t the end of market consolidation attempts

Monday 9th October 2017 | 0 Comments

 

No I am not talking about the unqualifiable rumours that Doublestar made an offer of up to 250 million euros for Zenises. Rather, that in the first week of September we learnt that Doublestar’s proposed acquisition of Kumho was collapsing before the firm’s eyes after the Qingdao-Chinese tyre manufacturer asked for a double-digit discount. And it is also worth considering what all this means for the wider tyre manufacturing sector.

Doublestar had asked for a 16.2 per cent discount on the basis that Kumho’s financial results were not as strong as expected and therefore there were further risks attached to the proposed purchase.

But this wasn’t the only reason the fight for 42 per cent of Kumho fell over. Park Sam-Koo and the board of Kumho Industrial Co., also wanted 0.5 per cent of Kumho Tire’s sales in brand royalties for 12.5 years and a clause ensuring that Doublestar uses the Kumho name for the entire period.

The problem is that Doublestar only wanted to pay 0.2 per cent of sales for rights to the Kumho name for a five-year period, with the option of extending this for a further 15 should market conditions be favourable.

There was a political dimension too. Because Kumho supplies tyres to South Korean government fighter jets, the local government is reportedly reticent about giving too much access to such technology to the Chinese. By law, the trade minister has the authority to approve acquisitions of military suppliers by foreign buyers. This, set against a context of trans-pacific sabre rattling between North Korean leader Kim Jong Un and US president Donald Trump in which China is the most significant ally of North Korea, was ultimately the last nail in the deal’s coffin.

There are two main ways of reading the Kumho/Doublestar deal collapse – a Sino-Korean culture clash or a convenient exit for Doublestar. There certainly was an air of culture clash throughout the negotiations. Privately, Chinese tyre executives told Tyres & Accessories they expected Korean jobs to be cut should a deal go through. Also, the last minute bid-altering behaviour exhibited by Doublestar is reminiscent of face-enhancing negotiation techniques not uncommon in China. In other words, raising the stakes as a deal comes to completion conveys the message that the negotiators are not a push-over. But it doesn’t look like many people consider negotiations to have been very easy up till now.

Therefore, the deal’s collapse could well have been a convenient and ultimately face-saving end for Doublestar. While the Qingdao-based tyre manufacturer has undoubtedly been growing at a rate of knots in recent years, with Kumho still around the 14th largest tyremaker in the world, it was always going to be a bit of a stretch.

With this in mind, it is worth remembering that Doublestar’s bid was based on a five-member consortium with Qingdao-based investment firms for a combined 223 billion won (about $194.11 million) of the 720 billion won (approximately $826 million) deal to acquire Kumho. The plan was believed to have been that banks would leverage the remainder to cover the difference between purchase price and funds raised. Thus there were concerns interest would reach rates of 5 per cent, equating to around 35 billion won (approximately $30 million) a year and that Doublestar and its partners wouldn’t be able to keep up repayments.

So what happens next?

While Doublestar was still working on the bid Korean news sources reported briefings that the Kumho Asiana Group would consider asset sales in China to help turn around Kumho Tire prior to the collapse. With these China market still very much in state of flux, these assets aren’t as valuable as they once were. Therefore Kumho – as one source told us – remains very much “in play”.

At this point it is worth remembering that, while they have all ruled themselves out, ChemChina, Continental, Michelin and most recently Apollo have all been linked to a Kumho acquisition. What is interesting here is who hasn’t been publically linked. While big named firms are often connected with high-profile mergers and acquisitions, there are two key groups worth watching in the future – mid-table manufacturers and consortia.

Mid-table firms, which are increasingly requiring greater scale and global coverage to compete with the top table, stand to gain the most from a strategic acquisition of a similarly sized counterpart. For obvious reasons they will know the business well and will cherry pick partners/targets based on complementary benefits in geographical coverage as well as technology. While slightly different and higher up the table, Yokohama’s purchase of Alliance Tire is an example of this – not only did Yokohama gain a good quality OTR division, it also gained a brand name or two along the way.

We must also look out for consortia emerging from the left-field. ChemChina, which was consistently overlooked as serious bidder for Pirelli, presents one example of how this could happen – especially with the benefits of state and petrochemical backing. However, private equity has been sniffing around the tyre sector for years, so nothing should be ruled out.

And, while we’re at it, we shouldn’t limit our thinking to Kumho. A number of different firms are potential merger and acquisitions at the top, middle and bottom of the global top 20 of tyre manufacturers so there is everything left to play for.

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Category: Company News, Editorial/Comment, International News