MEMPHIS, Tenn.-Could TBC Corp.'s proposed buyout of Big O Tires Inc. bolster sales and earnings for both companies? At least one securities analyst thinks so.
Edward J. O'Brien IV of Hilliard Lyons Inc. in Louisville, Ky., contends both companies stand to benefit from the potential synergies resulting from TBC's offer to buy all outstanding Big O stock for $16.50 per share, or $56 million.
The proposed acquisition would result in a ``healthy mix of philosophies,'' Mr. O'Brien said in an April 6 research report on TBC.
``It's a great combination,'' he told TIRE BUSINESS. TBC, with its focus on costs, is ``really good at distributing tires cheaply.'' Big O, with its focus on sales and marketing, is ``really good at selling franchises.''
The acquisition, he said, would free Big O from the nitty gritty of tire distribution and allow it to concentrate on what it does best-while offering TBC the increased volume it needs to reduce unit costs.
The analyst said he expects the companies to reach a definitive agreement on the purchase before the end of April and looks for the deal to close by June 30.
Mr. O'Brien said his company has assigned a ``buy'' rating to TBC shares, in part because they're selling at a ``significantly discounted'' price compared with their underlying value and also because the proposed Big O acquisition would provide what Mr. O'Brien termed ``the much-needed catalyst to boost TBC earnings.''
The report suggests TBC shares, which have been selling at $6-$7 could reach $14 within the next two to three years.
TBC is the largest private brand tire distributor in the U.S., with 1995 sales of $236 million and an estimated 6-percent share of the replacement tire market.
The Memphis, Tenn.-based company markets Multi-Mile, Cordovan and Sigma brand tires through 120 distributors across the U.S. It also distributes batteries and auto parts under the Grand Prix and Astro-Lite brands.
Northern States Tire, purchased in September 1995, was TBC's first foray into tire retailing.
The operation includes two retail stores and a primary warehouse in Lebanon, N.H., a smaller warehouse in Brockton, Mass., and a retread plant in Lancaster, N.H.
Englewood, Colo.-based Big O is the largest U.S. franchiser of retail tire stores, with a total of 387 stores in 18 western and midwestern states. The company's proprietary Big O brand, which it supplies to these outlets, accounted for about two-thirds of its $142 million sales in 1995.
If the acquisition proceeds as planned and receives the necessary approval from Big O shareholders, the analyst believes Big O will continue to grow, ``but at much lower costs by letting TBC run the tire distribution portion.''
His report said TBC distributes tires for about $0.71 each, whereas Big O's distribution costs run about $1.83 per tire.
Mr. O'Brien estimated that the addition of Big O's tire purchases would increase TBC's unit volume by 15 to 20 percent.
``Declining volumes have caused lower operating margins at TBC for the past two years; this deal should address this issue,'' he wrote.
He also said the acquisition should reduce Big O's selling and administrative costs, which are 1.5 times TBC's, though its sales are only one-fourth of the Memphis-based distributor's.