Time for Goodyear to Set Foot in Russia?

Speculation that the Goodyear Tire & Rubber Co will enter the Russian tyre market with a big investment is starting to become more concrete. Reports by a Russian analyst explain that the American tyre giant has shown the “most interest” on the subject of a partial takeover of joint-stock company, Nizhnekamskshina.

The price for a majority stake in Nizhekamskshina (75.2 per cent of which currently belongs to Tatneft, Russia’s seventh largest oil producer) is said to be about $100 million, says the report citing sources in Tatneft’s management. Although the US company “has agreed to pay” this much money, the question of whether its bid will be successful remains unanswered. Furthermore, the analyst suggests that Tatneft is currently negotiating with representatives of at least three Western tyre majors with regard to Nizhnekamskshina. Apart from Goodyear, Michelin and Nokian also seem to be interested and have held talks with the target company, a Baltic Financial Agency analyst has said. Nizhnekamskshina is the biggest single tyre factory in Russia with an annual capacity of 11.7 million units that cover, according to company publications, about 28 per cent of the Russian tyre market. However, during recent years the tyre manufacturer has been in the red.

Nizhnekamskshina’s parent company Tatneft has not yet decided what to do with Goodyear’s bid. At the same time, Tatneft has to resolve its conflicting objectives, the Baltic Financial Agency report continues.

First of all, Tatneft, the majority owner of Nizhnekamskshina, would not benefit from selling its stake in the tyre factory too early – regardless of whether it sells it to a Western investor or to a newly founded joint venture company. This is because net profit margins are currently flat at 2.6 per cent – in 2004 net profits were only $11 million from a turnover of $421 million. For the current year the analyst expects net profit margins to grow to eight per cent, finally creating a presentable profitability. Originally, Tatneft didn’t have any intention of talking about selling its stake in Nizhnekamskshina before it had achieved a net profit margin of at least 15 per cent. This was, of course, in order to optimise the selling price of its stake. Nowadays the company is talking about a more modest double digit figure, writes the Baltic Financial Agency.

Secondly, Nizhnekamskshina needs to invest considerable amounts of money, but at the same time has to manage considerable debts. Tatneft is said to be interested in selling a majority stake in Nizhnekamskshina on the condition that the potential buyer will pay off some of its loans. These debts have risen to about $105 million, since the tyre manufacturer installed a fully automated production line a year ago. Back then Nizhnekamskshina bought the production line including machinery and know-how from Pirelli investing between $50 – $60 million. Now the factory produces a total of 2 million passenger car radials each year, which are subsequently sold under the “Kama-Euro” brand.

Going back to the ‘considerable debts’ – at the moment Nizhnekamskshina is paying them off a bit at a time, reports the Baltic Financial Agency. “The enterprise will spend the main part of its net profit for 2004 and 2005 on Tatneft’s debt repayment,” the report explains. But, if the analyst is correct this will only cover half of Nizhnekamskshina’s loans. (In 2004 and 2005’s net profits will only add up to a maximum of £53 million dollars.) Even under these ‘ideal’ circumstances, the tyre manufacturer will not be able to invest its profits in the modernisation of its production facility. Another way the company could get rid of Tatneft’s loans is by creating new equity through a closed share offering. This way, Tatneft could be repayed through an enhanced stake in the company.

In fact, this was even discussed publicly, as Tyres & Accessories was made aware during the Tires & Rubber exhibition in Moscow in early February. It is generally expected that the parent company could increase its stake in Nizhnekamskshina up to 90 per cent from the current 75.2 per cent. At the moment another nine per cent of the shares belong to Nizhnekamskshina’s management, while 16 per cent are free float shares.

Current Tatneft plans only allow for further investments after the ‘debt questions’ have been answered, but not before next year. The quoted analyst report refers to necessary investments in new steel-cord machinery as well as in rubber mixing.

For both projects, “initial expenses” of about 100 million dollars will be needed, the report continues. According to Nizhnekamskshina’s CEO Radik Iljasov, “the strategic investor who is ready to pay this sum” will get the majority stake of 50 per cent plus 1 share from Tatneft, and therefore the technical majority.

“We certainly recognise the importance of the Russian market,“ the general director of LLC Goodyear Russia, Henry Braun, told T&A at the Tires & Rubber show in Moscow some weeks ago. Mr Braun’s comments as well as the latest analyst report suggest that the American tyre giant is likely to make some specific decisions on the subject, sooner rather than later.