Consolidation the order of the day in Russia
Old habits die hard, and for many of us our knowledge about Russia is at best sketchy. Yet much change is taking place there, and the tyre industry is not missing out on this. Europe’s major tyre makers today have, or are in the process of acquiring, a presence within the region, and Russian companies are also working to secure their share of a growing and lucrative market. Keeping track of various deals can sometimes be complicated…
Those who regularly visit the tyrepress.com website will already be aware that Pirelli and Russian state-owned corporation Russian Technologies (Rostechnologii) recently agreed to pay 222 million euros for the Kirov factory operated by Sibur-Russian Tyres. The two companies and Sibur Holdings signed an agreement on July 25 for the transfer of this asset into a Pirelli/Russian Technologies joint-venture company. The transfer of the Kirov plant is to take place before November 2011; the July 25 agreement also entails the transfer of further assets that should lift the joint-venture’s production capacity from seven million units – the Kirov plant’s capacity – to a total of 11 million by 2014.
Majority JV share an option for Pirelli
This transaction covers the first of two joint-venture projects outlined by a Memorandum of Understanding (MoU) signed between Sibur Holding, Pirelli and Russian Technologies on November 26 last year. Announcing the document’s signing, Sibur explained that under the terms of the first joint-venture selected Sibur assets would be acquired by Pirelli and Russian Technologies; the joint-venture would own 90 per cent of the assets, with Sibur holding onto the remaining 10 per cent. Initially Pirelli and Russian Technologies possess equal shares in the joint-venture, however within the context of the agreement Pirelli has the option of increasing its stake to 70 per cent through a three-year put and call option mechanism.
The Kirov factory will produce Pirelli brand winter passenger car and light commercial vehicle tyres, particularly studdable versions, for the Russian and CIS replacement markets. Pirelli and Russian Technologies anticipate the joint-venture will hold a market share of approximately 20 per cent and its sales are expected to amount to approximately 300 million euros in 2012, growing to over 500 million euros in 2014. This sales growth will result in part from a 200 million euro investment in plant upgrading and capacity increases to be implemented over a three-year period from 2012 to 2014. According to Pirelli and Russian Technologies, double-digit profitability will be reached from 2013 onwards, once the start-up phase is over. Pirelli will consolidate the joint-venture at the moment of acquisition as per the terms of the management agreement.
Convoluted path to Kirov acquisition
The path to acquiring the former Amtel-Vredestein factory began several years ago – and even back then Pirelli was mooted as a potential buyer. In 2008, Sibur-Russian Tyres commenced a project to assume control of the Amtel Group’s assets, yet the company found itself in financial difficulties a year later and suspended all investment plans. In the meantime, on June 22, 2009 the Kirov plant entered voluntary bankruptcy. When news of this first circulated Pirelli was named by the Kommersant newspaper as a possible purchaser; however the paper also quoted the director of Sibur Russian-Tyres director, Igor Karavaev, as saying it was “unrealistic” for any investor, especially a foreign player, to purchase Amtel’s assets. The Russian company itself eventually obtained control of Amtel’s assets the following year.
Upon agreeing to the Kirov plant’s sale on July 25, the three parties involved reiterated that, in line with the November 2010 MoU, the process of identifying other Sibur Holding plants that would form the core of a second joint-venture had already begun. While specifics of this second joint-venture are yet to be announced, according to the MoU it will focus on the meeting increasing domestic market demand for original equipment passenger car tyres and in the industrial heavy truck and agricultural machinery sectors. This second joint-venture company will, according to Pirelli, acquire a “significant” stake in Sibur-Russian Tyres – 40.1 per cent – and Pirelli will also directly obtain a 10 per cent share in Sibur-Russian Tyres in exchange for providing technologies and production processes under license, upgrading plant technology and sharing its know-how in the areas of logistics, quality control and organisation of activities. Following the transfer of assets and restructuring, Sibur’s share in OAO Sibur-Russian Tyres will have reduced from 100 per cent (before signing the MoU) to 49.9 per cent. Above and beyond the two joint-ventures already outlined, the MoU covers the joint Pirelli-Russian Technologies construction of a steel cord factory within the Togliatti special economic zone in Russia’s Samara region.
While lowering its stake in Sibur-Russian Tyres, this new relationship with Pirelli and Russian Technologies offers Sibur Holdings opportunities to expand its synthetic rubber business. The MoU agreements call for Sibur to act as a long-term supplier of the substance to both Pirelli and the two joint-venture operations. On top of this, the Russian and Italian companies will jointly develop high-technology synthetic rubber-derived products for use in the production of premium passenger car tyres.
Will Nizhnekamskshina bring a Conti connection?
It will be interesting to watch the impact this new joint player will have on Russia’s tyre industry. Sibur Holdings makes no secret of its intention to step away from its tyre business; early last year company president Dmitry Konov spoke of an “exit strategy” involving the tyre maker, which currently produces an estimated 24 per cent of Russia’s tyres, and during a press conference last October he discussed the company’s aim of disposing of its tyre operations “at a profit.” With this in mind, at the start of the year Sibur outlined plans to establish Sibur-Russian Tyres as the leading Russian tyre maker and a top ten global player, increasing its passenger car, truck and light commercial vehicle market share in the “B” and “C” segments to 30, 35 and 55 per cent respectively while entering the “A” segment with passenger car and truck tyres. The joint-ventures with Pirelli and Russian Technologies form a part of this overall plan, as does a potential alliance with the tyre units operated by Russian corporation Tatneft; the MoU also talks of the possibility of a merger with or the acquisition of Tatneft’s Nizhnekamskshina unit, which currently produces a third of all tyres in Russia and operates agreements with German tyre maker Continental. Should Nizhnekamskshina’s assets be grouped together with those already or soon to be acquired by Pirelli and Russian Technologies, those trying to gain a firm understanding of the intricacies of Russia’s tyre market and who has what will face further headaches.