The latest news regarding Indian company Apollo Tyres acquiring Cooper Tire & Rubber Company (NYSE:CTB), one of the largest US tire producers, has been a surprise for all of us. At $2.5 billion, it is one of the biggest acquisitions involving an Indian acquirer and a US target. The combined entity will be a major worldwide player, and Cooper will help Apollo to get into the European and US markets to balance the decline in sales experienced in India.
The timing of the acquisition seems correct, as Apollo is seeing sales decline in India (a market that accounts for approximately 60% of its revenue). Another reason can be found at the opportunity to expand its position in other geographies such as Europe and Africa where its revenue grew by 5% and 15%, respectively, in the fourth quarter of 2013, as compared to the same quarter in 2012. It’s also worth noting that the company is in great shape to focus on an acquisition: its operating profit grew 29% and net profit soared 50% in 2013 as compared to 2012. Finally, another positive aspect might be that the US auto and truck industry is also recovering from the economic crisis, and Cooper Tire & Rubber Company (NYSE:CTB) has posted a record operating profit for its first quarter of 2013. The company reported a profit of $97 million, even with global declining unit volumes, and ended the quarter with $272 million in cash and cash equivalents. All these reasons combine to explain the acquisition timing.
How does this impact the American tire sector?
Cooper Tire & Rubber Company (NYSE:CTB) is one of the leading US companies in the tire market. It is the fourth largest US manufacturer and eleventh globally, with a 14% market share in the US light vehicle replacement tire market. It has several factories in the US and some in other locations such as Mexico, China, England and Serbia, as well as a very broad brand offering. This would be a perfect complement for Apollo because it will give a better penetration to those markets and would diversify its current revenue mix. The deal could certainly change the US tire market, as Cooper Tire & Rubber Company (NYSE:CTB) could become one of the leading players.
The Goodyear Tire & Rubber Company (NASDAQ:GT) is another huge player: it not only serves the replacement market but also original production with a diverse range of products and a great geographical diversification across all continents. Although its unit volume has decreased substantially, it has maintained its costs and has a similar operating income to what it had in 2007 (around $1.2 billion). The company also has a healthy balance sheet, reporting $701 million in free cash flow for 2012. It has a solid performance in several countries and will definitely be one of the leaders for quite a long time. The Apollo/Cooper Tire & Rubber Company (NYSE:CTB) deal could diminish its market share in other geographies but it is unlikely that it will change the entire US tire sector landscape.
Titan International Inc (NYSE:TWI) is also a strong player in the off-highway wheel, tire and undercarriage market. The company is focused on the agricultural market, with this segment representing 59% of net sales in 2012 while the construction and earth-moving segment only represented 28%. The company posted solid first quarter results for 2013: sales were up 25% and it improved its gross margin, though it could have done better. Titan International Inc (NYSE:TWI) is geographically diversified and in good position to gain market share in Europe, but it still has to develop its Chinese and Indian market through a joint venture. The firm is exposed to risks in the agricultural equipment market, however; this could pose a threat considering the global crisis and cuts in expenditures on new equipment in the agricultural or mining industries.
The problem most companies in this industry face is that they produce tires for the market they serve: cars, trucks, agricultural machinery or mining. The tire companies’ costs are heavily tied to raw materials and labor costs as well. Raw materials account for 50 to 55% of the cost of goods sold while labor accounts for 20 to 30%. That is why a company that can drive down labor costs or supply a portion of its raw materials can be in pole position in a sector that is fiercely competitive.
Therefore, Apollo’s acquisition of Cooper Tire & Rubber Company (NYSE:CTB) will not generate a complete change in the US tire market. As some big countries are recovering from the global economic crisis, Apollo could take advantage of this by expanding its footprint through the Europe and North American markets that could drive profits up. Also, this could lead to tougher competition and lower margins that could affect some other tire companies’ earnings.
Vanina Egea has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Vanina is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Shakedown in the Tire Industry originally appeared on Fool.com and is written by Vanina Egea.
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