AKRON—If a proposed merger of four of the continent's largest independent commercial tire dealerships pans out, it could produce a single mega-business entity of a size to be reckoned with. The as-yet-unnamed entity would offer more than 55 service locations and boast annual sales in excess of $350 million.
But the proposal faces at least one major obstacle—the refusal of its primary supplier, retreading materials and equipment maker, Bandag Inc., to transfer the existing franchises of these four businesses to the new enterprise.
Of the dealerships involved—J.W. Brewer Tire Co. in Wheat Ridge, Colo.; Pomps Tire Service Inc., Green Bay, Wis.; Universal Tire Inc., Nashville, Tenn.; and Joe Esco Tire Co., Oklahoma Cityall are Bandag retreaders.
So is another large commercial dealership in the South, which is thinking of becoming the fifth member of the group, according to one of the participants, who asked not to be identified because of a secrecy agreement.
The combined purchases of the five dealerships would make the resulting company Bandag's largest franchisee in North America. Adding in the annual sales of the proposed fifth member of the group, whose identity could not be confirmed, would bring the group's total revenues to more than $500 million.
Such a company also would be one of the largest volume purchasers of commercial truck tires from Michelin North America and from Bridgestone/Firestone Inc., as well.
J.W. Brewer, for example, placed eighth in the rankings of North America's largest independent commercial dealers, found on page 11 of this issue. Pomps finished ninth and Universal Tire was 13th on the list.
Pledging an undisclosed amount to capitalize the venture and working behind the scenes to help structure the deal is Kohlberg & Co., an investment banking firm in Mount Kisco, N.Y.
Kohlberg & Co. is owned by the family of financier Jerry Kohlberg, who during the 1980s gained fame and fortune pioneering the leveraged buyout. He is a co-founder and the first ``K'' in KKR (Kohlberg, Kravis, Roberts & Co.)—the firm that pulled off North America's biggest corporate takeover with its acquisition of RJR Nabisco in 1989.
While all the details of the proposal are not yet finalized, participating dealers expect to retain a controlling interest in the venture, provided Bandag transfers their franchises. That would leave Kohlberg & Co. holding a 49-percent or minority ownership, according to Brewer Tire's Alex Brewer, one of the four dealers presently involved.
A Kohlberg spokesman confirmed that the goal of the participating companies is to remain as Bandag retreaders. ``It was always our expectation that they (Bandag) would remain a very important supplier," he said, "and our hope is still that we will reach agreement with them."
Neither the amount of Kohlberg's financial participation nor the name of the proposed holding company has been disclosed, he said.
Talks between the participants and Kohlberg & Co. were proceeding quietly, according to Mr. Brewer, until May 13, when Bandag issued a press release stating that four of its franchisees were negotiating with a privately owned investment firm to sell a substantial interest in their tire operations to a new business entity.
Muscatine, Iowa-based Bandag said it had informed the participating dealers that the company does not intend to transfer ownership of their current Bandag franchises to the proposed entity.
Together, the four franchisees account for about 4 percent of Bandag's annual sales, the company said in a statement.
Bandag said its decision was based on the understanding that the proposed transaction would leave the four franchisees with only minority ownership of the resulting holding company-something that participating dealers contend will not be the case.
Lacking majority ownership and control of their businesses, Bandag said, the participating franchisees would not be able to assure fleet customers-and Bandag-of consistent product quality and service.
The news release said Bandag was not able to predict the extent of any distribution that might be lost due to the possible departure of the four franchisees nor to speculate on the resulting impact on its sales and earnings. The company said it has more than 550 franchisees in North America and more than 1,300 worldwide.
Contacted later by phone, Bandag's Chief Financial Officer Warren Heidbreder said there was no change in the company's position. However, he said talks between the company and the four franchisees were still going on.
Mr. Heidbreder said Bandag had decided to issue the press release because the franchisees' activities were becoming public knowledge, and the company believed it should share such information with the investment community at large rather than allow it to just trickle out.
Meanwhile, Mr. Brewer said Kohlberg has agreed to accept a 49-percent interest if that's what it takes to get Bandag to transfer the franchises, and each of the participating dealers will continue to run their operations as before.
Mr. Brewer said the deal not only will provide the dealerships with increased financial backing but also greatly increased service capabilities. With a potential of having service outlets located across the nation, ``We've got a heck of a story to tell customers,'' he said.
The concept, he explained, is an attempt on the part of participating dealers to survive in the face of increasing competition in the commercial tire market. What with ``everything going national accounts and margins going down,'' these days independents find themselves fighting for survival.
``We've got to get together and come up with something to put strength back into the independent tire dealership, and I think volume does it,'' he said.