Now Pirelli’s been sold, who’s next?
In case you haven’t heard, as much as 65 per cent of Pirelli is in the process of being sold to ChemChina. It’s a complex plan and there’s a long road ahead, but the deal has been done and so takeover wheels are in motion (see ‘Pirelli/ChemChina deal – the story so far‘ for complete coverage of this part of the story). So what’s next? The deal can’t fail to have an impact at Pirelli, but what about the other top five tyre manufacturers and beyond? We hinted at market consolidation in this column last month, with reference to restructuring proceedings at Shandong Deruibao Tire Co., Ltd and possible contagion in China; and Pirelli CEO Marco Tronchetti Provera made the market aware of that he was planning to sell his stake within two years in January 2014; but few would have named this particular bidder and this particular timing. Now we are faced with the possibility, even the likelihood that the Pirelli/ChemChina deal is going to precipitate further micro and macro consolidation within the tyre market – even a re-shuffle of the tyre industry’s top 10.
But first a few more words on the Pirelli part of the story. After the initial excitement around the deal calmed down, a second wave of speculation began to suggest that a competitor may offer a counter bid. You can understand why. Pirelli has been subject of such talk several times in the last few decades – think of the Dunlop and Continental tie-ups attempts to name but two. But we must also remember that these haven’t come to fruition.
Another explanation why such suspicions make sense is for strategic defensive reasons. Talking to some market insiders, there are real concerns that the Pirelli-ChemChina merger means the Italian manufacturer has beaten other, bigger players in the top five to the punch when it comes to directly accessing the burgeoning domestic Chinese tyre replacement and OE supply markets. Add in the fact the impending Sino-Italian nuptials connect Pirelli with a state-owned firm in a quasi-communist country and, they say, there is more reason to worry.
However, despite reports linking Bridgestone to such a defensive counter offer, and despite Tronchetti’s admission that the company had been in talks with more than one other non-Asian tyre makers (which could also include Hankook and/or Yokohama), it doesn’t seem likely that any will succeed. The reason? As one market analyst told Tyres & Accessories, blocking out the Chinese in this way is just too expensive a move – and the Chinese will probably come back again via another angle anyway.
Aeolus’ post-Pirelli truck tyre merger plans add fuel to the Chinese market consolidation fire
Nevertheless, counter offer talk only fuels speculation that ChemChina will be forced to raise its offer price above 15 euros, which is already 18 per cent above Pirelli’s three-month average. The other reason the financial markets are rubbing the hands together is because of the truck tyre sub-clause in the ChemChina deal, which sees Pirelli effectively merge its truck tyre unit into the Aeolus Tyres business. As analysts at Exane BNP Paribas said in an insightful report on the subject, “this allows us and the market to value the two divisions of Pirelli separately”. This means the value of the sum of the highly profitable passenger car tyre business combined with post-merger (but already relatively profitable) Pirelli/Aeolus truck tyre business is greater than the whole original firm. Or in banker-speak, there is virtually no downside to their investments in Pirelli.
Assuming the deal goes through – and with both Pirelli’s and ChemChina’s chairmen fully behind it, there is every reason to assume it will – Aeolus’ domestic Chinese operations are likely to expand significantly. This stands in stark contrast to Pirelli’s modest or non-existent projected production capacity increase schedule. Over the next four to five years Aeolus is likely to both ramp up output at its existing factories and increase the number it runs. With this in mind, Aeolus’ post-Pirelli truck tyre merger plans add fuel to the Chinese market consolidation fire. As we reported last month, a number of modern mid-sized Chinese plants are relatively precariously positioned economically. Therefore the bargain-basement acquisition of on-the-brink manufacturers is a very quick way to increase capacity without having to build more factories. Saving jobs and existing factories in this way is also politically astute – something a government-owned enterprise is likely to be aware of. This being the case, the Pirelli-ChemChina deal could spark a wave of micro-consolidation within the Chinese tyre manufacturing industry in the next few years.
Top 10 re-shuffle
Likewise, there is likely to be an impact on the global stage as well. As INSEAD’s Professor Karel Cool wrote recently, Cooper Tire “remains a prime candidate”. But there are others. Chief among these, according to Professor Cool is Continental, which due to the fact that it is owned by the debt-laden Schaeffler Group and is said to be close to an IPO. The suggestion is that such a move would offer fresh capital for the non-tyre businesses, but also potential takeover options for Conti.
Indeed Professor Cool observes that a “Conti-Hankook tie-up would create a major new force” at the top of the world rankings and “the low euro would sweeten the bid”. And finally, Goodyear is said to be “within reach” of “several bold Asian players”. What the ChemChina news and Chengshan’s Cooper ownership aspirations before it tell us is that the growing Chinese manufacturers should not be underestimated.