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February 15, 1999 01:00 AM

ANALYSTS SEE ALLIANCE AS POSITIVE

Bruce Davis
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    AKRON—Goodyear's alliance with Sumitomo Rubber Industries Ltd. and a global restructuring are viewed as positive by analysts, and may be followed by other major tire industry deals. ``It wouldn't surprise me if things heat up before this deal closes,'' said Michael Sison, an associate of Goodyear analyst Saul Ludwig of McDonald & Co. Investments. ``There are opportunities out there, including some of the Asian companies.''

    ``Without a doubt, the curtain has risen and the bell has rung'' on a new round of consolidations, said Dennis Byrne, professor of economics at the University of Akron.

    Analysts see as positive the possibility of annual cost savings of $100 million or more the companies will achieve from joint purchasing and other cooperative efforts.

    ``Anytime you can get a significant reduction in costs, it has to be viewed as positive,'' said Nicholas Colas of Credit Suisse/First Boston. ``The impact of this should be even greater for the Dunlop-brand products, since Sumitomo's been dealing from a smaller perspective anyway.''

    The alliance will help Goodyear tackle medium- and long-term problems, but the company also has considerable short-term cost and efficiency problems to address, Mr. Colas said. The firm began to address these shortcomings with its tire production phase-out notice at Gadsden, Ala., he added.

    ``The competitiveness of the global tire market has meant low margins for many companies,'' said Mr. Sison. ``Streamlining via consolidation is a positive move.''

    Goodyear's agreement differs from previous tire industry mergers and acquisitions because it's an offensive, rather than a defensive move, Mr. Byrne said.

    ``Goodyear recognized that the battle for market share will be fought in North America, Europe and Japan, and it's solidified its position in the first two, and established a necessary position in Japan with this move,'' he said.

    Goodyear will borrow the $936 million in cash it will pay Sumitomo to cover assets acquired. That will push the firm's debt/equity ratio to about 40 percent by the end of 1999, said Samir Gibara, Goodyear chairman and CEO.

    Although this debt structure will be greater than the company's goal of 30 percent, it still is within guidelines the company disclosed at its 1998 annual meeting, Mr. Gibara said. In addition, Goodyear feels the new ventures will provide sufficient cash flow to allow it to pay this off in about two years, he said.

    By comparison, Goodyear's debt/equity ratio was 67 percent after it fended off James Goldsmith's takeover attempt in 1986, and the company gained no new equity base from it, Mr. Gibara said.

    The Sumitomo alliance brings Goodyear more than $2.5 billion in sales, 10 modern tire plants in Europe and the U.S., and access to Sumitomo's research and development network—all at about one-fifth the price it would take to build it from scratch.

    The deal should provide Sumitomo a much-needed bottom-line boost. The company's net profit/sales ratio the past five years has not exceeded 1 percent, with operating profits lingering in the low 3-percent range, according to the company's annual reports.

    Goodyear may have seized upon a golden opportunity that might not have been available if not for the current economic difficulties in Japan, said Richard A. Henderson, an analyst with Pershing, a division of Donaldson, Lufkin & Jenrette Inc.

    The coming year could be a landmark for tire-industry consolidation, said David Bradley, an analyst with J.P. Morgan Securities. ``I don't think Goodyear's done, and Michelin and Bridgestone/Firestone are in the game.''

    Some of the potential tire companies up for grabs include South Korea's Kumho & Co. Inc. and Hankook Tire Co. Ltd., and Japan's Yokohama Rubber Co. Ltd., Bradley said.

    The tire activities of Italy's Pirelli S.p.A. and Germany's Continental A.G. also are possibilities—Continental less so because of its own recent diversification efforts, analysts said.

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