Conti acquisition of Goodyear OTR ‘a complementary fit’ and analysts’ preferred ‘area for capital allocation’

Valuing Goodyear’s for-sale OTR tyre business at between $800 million and $1 billion, financial analysts have evaluated a hypothetical acquisition of the unit by Continental AG as “a complementary fit”. Writing in an investor’s note dated 23 April 2024, the Jefferies report endorsed the business case behind the scenario:

“We estimate a possible acquisition of [Goodyear] OTR by Conti would be 4-6 per cent EPS [earnings per share] accretive and leverage would increase to just 0.9x from 0.7x in [estimated full-year 2024 figures]. Whether an acquisition should be pursued at the same time as other portfolio actions is a fair question, but investment in tyres is our preferred area for capital allocation.”

The well-reported background is that Goodyear put the Dunlop brand rights it owns plus the Goodyear Chemical and Goodyear OTR tyre businesses up for sale in November 2023. We took a close look at possible Dunlop valuation scenarios in March 2024. Roughly a month later, Jefferies is assessing possible suitors for Goodyear OTR and finds that Continental represents a good candidate:

“Within our coverage we note Off-The-Road (OTR) closely aligns with Conti’s acquisition strategy.”

Noting that Goodyear Chemicals historically generates $1 billion annual predominantly Americas-based annual revenue as well as “high single digit margin”; and that the Dunlop brand makes $700 million of annual revenue predominantly in Europe, the Jefferies analysts highlight that – by contrast – Goodyear OTR’s $700 billion of annual revenue is mostly geographically situated in the Asia-pacific region and offers “mid-teens margin”.

More specifically, “Continental [as an automotive supplier as well as tyremaker] has been clear that tyres, APAC and specialities are all focus areas for organic investment and acquisitions. The Goodyear OTR business ticks all three boxes.”

However, there is likely to be competition: “Whether Conti is able to secure the asset is another question with likely interest from the large Korean and Chinese tyre manufacturers.”

But that competition is unlikely to come from the other European premium brands: “Within our coverage we wouldn’t expect Michelin to be a forerunner with an already strong market position in the segment and with Pirelli purely focused on passenger tyres. Further, Conti has sufficient capital to fund both the acquisition and continued investment in the business to grow revenues and scale up over time.” Nevertheless, it is worth noting that the Jefferies analysis overlooks the possibility of interest from Prometeon, the former Pirelli industrial tyres business, which was spun off a few years ago and has a sector-specific commonality with Goodyear OTR.

An $800 million to $1 billion price-tag

When it comes to valuing the Goodyear OTR business, the analyst state:

“Goodyear is targeting a reduction in debt of US$1.5 billion and has commented that it expects to achieve proceeds in excess of US$2 billion for the three businesses. Assuming the sale of OTR at a current market multiple of 8-10x, we calculate it could make up to 40-50 per cent of expected proceeds”. With expected proceeds of around $2 billion, that equates to an estimated price-tag of around $800 million to $1 billion for Goodyear OTR.

However, keeping such a business at the cutting edge will also require further investment, according to the analysts:

“Management have commented that the segment requires significant capital investment to achieve scale, especially relative to the size of competitors who are 4-5x larger.”

Should such an acquisition end up taking place, the analysts “assume operating margins of 15 per cent, synergies of 33 million euros… and an acquisition multiple of 9x EBIT”.