Bandag Sold to Bridgestone for $1 billion
You can read the entire article and download it as a PDF by clicking here
After several attempts they have now finally succeeded: Bandag Corporation heir, Martin Carver, has sold his and his mother’s majority stake in the company to Japanese tyre giant Bridgestone. It was probably high time for the American retreading specialist to make such a move, as in recent years they have been operating in a seemingly unfavourable environment. If Bridgestone had also chosen to go down the same path as Goodyear and Michelin, establishing its own equity retreading businesses, Bandag’s market environment could have been set to become even more unfavourable.
Martin Carver’s father Roy Carver, who died suddenly in the early 1980s, was generally regarded as an action-man, a businessman who took matters into his own hands, a charismatic personality who worked hard his whole life but at the same time also enjoyed the good things life has to offer. He dealt with piles of dirty casings found in the back yards of retreaders but also enjoyed the time he spent on his yachts in the Caribbean or the Mediterranean. When Roy Carver travelled across the Atlantic Ocean he usually flew in a Bandag company jet. He was able to speak the same language as the people working hands-on in the tyre industry, but at the same time he was fluent in several languages and felt comfortable when attending high-society events and dealing on equal terms with gentlemen – and ladies.
It was by pure coincidence that he met a man called Nowack from the German city of Darmstadt in the 1960s. Less luck was involved when he formulated his plans on how he could use Mr. Nowack’s invention and turn it into an enormous money-spinner. The German had developed and patented a retreading procedure.
During his Second World War military service in Africa he began working on his first retreads and after the war established a small production facility in Darmstadt. He chose the name “BANDAG” for his German company, an abbreviation of his initials B.A.N. (Bernhard Anton Nowack), the first letter of the place where Bandag was registered (Darmstadt) and the two letters “AG”, short for Aktiengesellschaft, the German word for corporation. It was in Rüdesheim’s world-famous Drosselgasse that Roy Carver later purchased Nowack’s company – over some very distinguished wines. Carver had amassed a degree of wealth through a pump factory, but it was with Bandag that he began conducting business on a large scale and earned millions.
Unlike Nowack, Carver focussed on the establishment of a franchise system, something that was only popular in the United States at the time. After perfecting the Nowack retreading process by the use of envelopes, he was able to write the first chapter in Bandag’s unique success story. Initially Bandag dominated the American market, and later also the European.
Roy Carver, who spoke fairly fluent German, also got to know those in charge at Stahlgruber in Southern Germany and from them learnt the benefits of setting up a foundation (the Stahlgruber Foundation) as the legal basis for a company’s operation. When he died it came as quite a surprise for his family, including his widow and sons, to find that they were more or less excluded from the top management of the company they had inherited. But the family successfully disputed this part of Roy Carver’s last will and finally gained full control over the corporation. This legal dispute showed the strong and unified resolve of the Carver family.
The decision was made that, of the three sons, Martin Carver would take over the company’s top job; Martin was generally seen as the most skilled and talented of the Carver sons. Today, Martin Carver (58) has been the CEO of Bandag, Inc. for 27 years.
When he took over responsibility of the company it was at first extremely successful. However, during recent years it has become more and more obvious that Bandag would have a hard time succeeding in a competitive environment dominated by Michelin, Goodyear and other new major tyre companies. The general conditions of the international commercial tyre market including the retreading business were becoming less and less favourable for the American retreading specialist.
This is Bandag
Currently Bandag is headquartered in Muscatine, Iowa, and has a market value of some $700 million on the stock exchange. It is controlled almost exclusively by the Carver family, who hold 98 per cent of shares with voting power. In addition to this, shares with no voting rights have been released. These shares will be converted at the end of January 2007 into shares with voting rights. During these changes the Carver family will lose some of their voting rights in the company but won’t lose control over Bandag.
During the past year Bandag had a turnover of $914 million and a net profit of $49.4 million. Over the last few years Bandag’s turnover has remained stable whilst profits have slightly lowered.
Bandag’s core business – at Muscatine they prefer the phrase “traditional business” – is the production and distribution of pre-cure retreads and other directly related products (such as special retreading machinery, cushion compounds etc). This core business accounts for about 60 per cent of Bandag’s annual turnover, according to 2005 figures. Eighty per cent of this core business is carried out in the US; this equals $539 million. The remaining 20 per cent of core business turnover is generated in Europe and the rest of the world. While in North America Bandag is still earning a healthy amount of money through its core business, the European branch Bandag EMEA (Europe/Middle East/Africa) has experienced hard times and even small losses, with an annual turnover of $91 million in 2005. And as it appears a reversal in this trend won’t take place during 2006 either, this signals a considerable decline compared with the past. In the late 1980s and early 1990s things were different. Back then the European division of Bandag generated a turnover of $130-140 million and contributed double-digit profits. Additional Bandag turnover generated in distant markets such as Australia and New Zealand come to about $33 million.
According to the company, Bandag sells pre-cure treads to about 920 franchisees globally, of which 315 are located in North America and 200 in Europe (December 2005). In all other markets Bandag supplies 410 additional franchisees, mainly smaller scale retreaders. All in all Bandag is represented in ninety-one countries and probably has the most extensive and wide-spread retreading network in the world at its disposal.
Bandag’s pre-cure treads are currently produced in eight facilities, three in the US, one in Canada, two in Brazil, one in Mexico and another in Lanklaar, Belgium.
As mentioned above, the American market is by far the biggest and most important market for Bandag, Inc. However, this is where competition is most severe because both Goodyear and Michelin dominate the new tyre market and, furthermore, have also established their own retreading systems over the years. They exercise control over their respective casings and are not interested in cooperating with Bandag; at any rate they are not dependent upon Muscatine’s retreading specialist.
Nevertheless, Bandag has established cooperative ties with new tyre manufacturers such as Continental/General, Yokohama and most recently with Slovakia’s Matador. In the US there is even close cooperation with Bridgestone. Throughout Europe, in turn, Bridgestone has preferred to cooperate with Italian manufacturer Marangoni and some years ago both partners even founded a joint venture company called Bridgestone Retread Systems (BRS). Both partners have claimed that their cooperation has so far been beneficial.
Tire Distribution Systems (TDS)
Bandag itself operates 15 retreading shops (December 2005) plus another 45 tyre outlets in eight US states, focussing on commercial tyres. Previous years saw a number of closures, acquisitions and sales that can be interpreted as a need to restructure this part of the business. The unit’s business figures have been in decline.
In 2003 TDS’s turnover was $239 million, last year it was only $168.5 million. Even more significant is the fact that in 2003 Bandag generated an annual turnover of $57.7 million with self-retreaded tyres, two years later it was only $30.9 million out of $168.5 million. Thus it generally can be assumed that taking over retreaders in the US in order to acquire new sources of turnover was less successful than anticipated.
Bandag’s third major business field – together with the retreading business and TDS – is Speedco. This chain was bought from Shell some years ago and as you might expect its main business is oil changes. Turnover is slightly more than $80 million but barely generates any profit. But in light of the predicted expansion of this business strong profits would not have been expected.
For many years Bandag operated almost without any real competition.
Competitors like Vakuum Vulk were probably not far away from Bandag technologically, but this company’s managers were more skilled on the technological side of things than they were with economics. The production of retreaded truck tyres according to Bandag’s technology soon led the market, the quality was out of reach and the American system was able to pick up the best retreading companies as franchisees from a vast number of applicants in many markets.
Bandag certainly is the best and perhaps even the best-known brand on the retreading market. As a good franchisor Bandag has focussed on providing retreading materials – treads and other compounds necessary for pre-cure retreading technology – and on controlling the quality of its franchisees. Bandag still commands the highest price for its treads on the market. Bandag was even in a position to dominate the markets at will. At one point in the past new tyre manufacturers even ran advertising campaigns not only claiming that their respective new tyres were retreadable, but that they were “accepted” by Bandag’s stringent requirements.
But many things have changed since then. International tyre majors don’t like the thought of standing second to what they might have considered as a medium-sized retreading specialist from Iowa. And they certainly don’t like being put under pressure by such a competitor.
As a matter of fact there isn’t a retreading business without casings and there definitely isn’t such a thing as good retreading without good quality casings. As a result good casings are core to any success in this business, and new tyre manufacturers have realised how to benefit from this situation.
Michelin made a particularly clear statement about where it was going in the US and was soon involved in an intriguing legal dispute with Bandag.
The American retreading specialist claimed that Michelin had “poached” Bandag franchisees while trying to convince them to breach contracts they had with their system supplier. Perhaps Bandag should never have entered into such a lawsuit because, as it turned out, Michelin’s managers weren’t willing to give in when Martin Carver abruptly dragged them to court. In the months that followed, plenty of moaning and groaning was heard from sources in Muscatine. It is obvious that a double-digit million dollar legal bill was not pocket money for a company that aimed to turn over half a billion, particularly when compared to a company like Michelin that had and still has an annual turnover of well over $15 billion.
As is often the case in lawsuits, at some points both parties involved settled their dispute before any judgement could be pronounced. It was agreed to keep the reasons and conditions of the mutual settlement confidential – officially nobody won and nobody lost. Since then both companies have tried to avoid any kind of close contact with one another.
In order to counter-act Michelin’s obvious desire to take on some of the franchisees, the system provider even decided to takeover some retreading shops itself which led to the birth of TDS (see above). As the corporation’s balance sheet shows, this business unit is contributing a good deal to Bandag’s annual turnover but this positive progression has been heading south. Some critics have even criticised the company saying that Bandag is buying the whole cow when they only want a bottle of milk. But did Bandag’s management really have an alternative?
For a long time retreading to Bandag’s standards was only possible for Bandag franchisees – all other systems fell short of the patented Bandag system. However, in the meantime more and more companies like Marangoni, Ellerbrock, Kraiburg or Oliver, which became serious competition manufacturing and selling products not far behind Bandag quality. At some point in the past Bandag’s technological advantages were minimised, but the products were still products that had a name. Because of its brand, Bandag can still charge a higher price per kilogram and consequently Bandag’s franchisees can charge a higher price for retreaded tyres – Bandag retreads have a higher brand value than other products. At the same time other competitors like Vipal (Brazil) or Galgo (Mexico) have entered the scene and have to be taken as serious competition in Muscatine, Iowa.
And it is not only them. Tyre majors like Goodyear and Michelin have also established their own respective retreading systems. Michelin has Remix and Recamic and can thus offer both mould-cure and pre-cure retreads. Goodyear in turn mainly focuses on pre-cure retreading with its Next Tread brand. In the US, Bridgestone has closely cooperated with Bandag over the years, whereas the Japanese tyre giant only recently founded a joint venture together with Marangoni on and for the European market. This obviously must have rung a bell in Muscatine.
With new tyre manufacturers entering into the retreading business, this meant a growing scarcity of good, retreadable casings, which Bandag’s franchisees desperately need. Goodyear and Michelin for example use all their leverage in order to control “their own” casings, keeping them in their systems wherever possible, and offering multiple retreadability of one casing and thus offering the lowest price per kilometre to big fleets.
At some point Bandag must have come to the conclusion that it could act like the tyre majors using their strategies as a template; in other more negative words: they were “playing Michelin” without being Michelin. And this is obviously very risky.
Internet users that visit Bandag’s corporate website may well have become familiar with several different special programmes and with a vast quantity of services directed at fleets, for example breakdown services or tyre management. Nevertheless, core business always was and still is the production of treads and their distribution through the international Bandag dealer network. The question is: Is this effort justified? And will it eventually pay off?
Bandag’s fleet business
The sheer dimensions of fleet contracts usually don’t allow franchisees or retreaders to enter into this business directly. Contracts of this scale are often signed by new tyre manufacturers, which then dictate to what extent retreaders will be allowed to join the game.
Bandag itself entered into the fleet business like – to simplify for argument’s sake – a new tyre manufacturer would have done. And, again, Bandag “played Michelin” without being Michelin. The French tyre giant can control the whole tyre business, from new tyres to mould-cure and pre-cure retreads. Michelin has the capacity to offer tyre management contracts at a large scale relying on an effective and powerful team. It has become more and more obvious over the past years that it is not only the tread that’s important, but rather its the casing that’s playing the most important role and therefore has the highest value. Today, most of Bandag’s competitors are capable of producing equal quality or at least come close to the proverbial Bandag quality. Even internal Bandag papers admit that the markets have changed in this respect, noting that it’s not the patents that are decisive but whether or not the corporation is able to get the best people involved and to continuously keep the costs down.
“Back to basics” in Europe
In the last year there has been a steady stream of news from Bandag’s European headquarters in Brussels regarding layoffs and resignations. There are said to be tremendous concerns amongst Bandag EMEA employees, which are heavily denied by the management. However, it is obvious that those in charge are nervous. Bandag has answered press inquiries from Tyres & Accessories by pointing out that legal steps will be taken should this or that appear in the daily e-Newsletter or the magazine. And whoever questions the fate of Bandag’s European production facility in Lanklaar in Belgium is criticised for being non-supportive, with questions about a possible closure of the Lanklaar plant in particular causing outrage and disapproval from Bandag. Reactions like this cause journalists to assume they “have hit the right nerve”. However, as there was a need to restructure Bandag’s European operations and the competitive environment and marketplace had changed permanently, making a “back to basics” strategy necessary, the European headquarters gave its approval. But this is it, there are no more detailed comments coming from Brussels.
“Back to basics” – a hypothetical strategy
The Belgium production facility in Lanklaar has an annual capacity of about 30,000 tonnes. To what extent this capacity is being used Mike Tirona, vice president and general manager of Bandag EMEA, does not say. His replies are elusive: Bandag was attempting to produce at full capacity each and every day. Such attempts to efficiently use the Lanklaar facility have only been partially successful. According to information from informed sources, capacity utilisation has experienced a steadily downward trend in recent years and today has reached about 50 per cent. Some other sources even say that this it too high because some 1,500 tonnes are now also coming from Bandag’s Brazilian facility with the aim of Europe substituting further Lanklaar capacity.
According to internal calculations the cost per kilogram should be 1.30 euros with a sales price of 4 euros. But it was becoming more and more difficult – market observers reveal – to realise such a sales price on the market. On the other hand the same observers say that Bandag’s costs per kilogram are somewhere between 2.50 and 3 euros. And this is a level where aggressive competitors like Vipal or Galgo can sell their products and still make good profits. Although Bandag is still able to realise the highest prices on the European market, it returns are quite meagre. As a consequence, costs have to be cut in every corner of the company.
The ideal way of achieving this would be to close down the Lanklaar factory and then supply the European market with treads produced in Mexico or in Brazil. Is it this what Bandag understands when talking about its “back to basics” strategy? Mike Tirona at any rate is refuting this.
Another way of achieving this would be the following: Bandag could have relinquished all its daydreams of trying to control all the fleet wheel positions. This could have seen Bandag pull back from the supply of all (fleet) services and only selling top quality pre-cure treads at low prices. This at least would have made it difficult for competitors such as Vipal and Galgo on the one hand and Ellerbrock/Marangoni and Kraiburg on the other to actually keep up with the American retreading specialist.
It is only a few months ago that Bandag lost a major fleet contract (GE Equipment Services/TIP Trailer Services) to Goodyear. According to insiders, Bandag has lost about 60,000 units of retreaded truck tyres to Goodyear; the deal being worth some 24 million euros including services. Goodyear in turn has now signed up with GE/TIP for about 18 million euros, in other words: with a discount of 25 per cent, Goodyear has purchased market share in Europe.
All this may be the case, but it also shows that a new tyre manufacturer is able to operate on a profitable basis even with prices that are way beneath Bandag’s own calculation and with prices that wouldn’t leave much room for the American retreading specialist. This is because new tyre manufacturers already control the casings and also because they are already established and remain strongly represented in the marketplace with their new tyres. Retreads can even be used to support new tyre prices. In the end it was more or less inevitable that such a big fleet contract would end up in the hands of the new tyre industry, leaving the retreading specialists a position on the sidelines.
Keeping all this in mind it is becoming clear why Martin Carver decided to sell Bandag, Inc. and why he has made this decision now. Bandag’s business approach does not fit anymore, it leaves the company open and vulnerable to competitors. Product supremacy and the company’s partial uniqueness are history, and significant growth of the company is not very likely. And new markets are still dominated by bias-ply tyres…
Furthermore, Bandag’s franchise network, which is still regarded as an asset, is becoming more fragile. In some countries franchise contracts have to be renewed every five years. Focussing on Bandag material as exclusive treads for franchisees is difficult to ensure and to control in many markets for legal reasons. Consequently there are more and more Bandag partners that also use materials from competing suppliers, whether or not this is officially tolerated. At any rate it appears that Bandag’s corporate headquarters have been turning a blind eye on what they cannot change.
Market observers claim to know that Martin Carver negotiated with Bridgestone’s (former) chairman, CEO and president Yoichiro Kaizaki on the takeover of Bandag some years ago. Back then a deal was close at hand when Carver made additional demands that weren’t part of the original negotiations. Subsequently, Bridgestone stopped all talks and lost interest in a deal, according to rumour.
Two or three years ago there were again rumours about negotiations between Bridgestone and Bandag, this time about selling the European division EMEA only. This time it was Bridgestone’s European president Shoshi Arakawa, soon to step into the role of Bridgestone Corporation CEO, who opted for a joint venture with Marangoni. What would have been the outcome had Bridgestone chosen to found such a joint venture for the American market as well? The answer must have caused Martin Carver many sleepless nights. Later on Mr Carver must have negotiated one more time with Mr Arakawa and it must have been clear to him that this probably was his very last chance within the foreseeable future to reach an agreement with Bridgestone; the rumours continue.
Other informed sources report that Martin Carver had a meeting with Francois Michelin in Clermont-Ferrand. He was politely welcomed by the retired Michelin patron, but evasive responses must have convinced him that the French weren’t interested in a deal. Therefore, finally it was high time to find a deal, sources say. In view of Bandag’s current market capitalisation a possible take-over price close to $1 billion is very realistic.
For Bridgestone the Bandag deal is coming at the right time. Currently, the Japanese tyre major is already world number one but Bridgestone does not only want to be in front in the Asian and in particular in the Japanese markets but also in North America and in Europe. An important factor is cost. Bridgestone wants to offer the lowest cost per kilometre in its commercial tyre business and this means it also needs an excellent and high-quality retreading business. At the same time Bridgestone can offer advantages that Bandag was never able to offer: access to the market plus the return of good, retreadable casings. Usually Bandag’s franchisees are also strong in terms of commercial tyre business thus joint forces can be quite useful and advantageous.
We may or may not regret Bandag’s sale to Bridgestone. But one thing is for sure: it is the retreader’s independence that is at stake here. It is probably only a question of time until the last major retreader is cooperating or linking up in some way with the new tyre industry.
We might remember what Mike Tirona once said – in an ever changing world, in a permanently changing competitive environment, adaptation is the rule. Yesterday’s business models are out of date, only new and modern models can prevail.
This is also true for Martin Carver. Together with his family he must have yielded a good return and he has lived well off his business during the past decades. Now, there will be a life beyond Bandag. From now on it is the Japanese tyre giant that will push Bandag’s retreading business towards new heights.
You can read the entire article and download it as a PDF by clicking here