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March 01, 1999 01:00 AM

COOPER, PIRELLI FORGE ALLIANCE

Bruce Davis
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    FINDLAY, Ohio—Cooper Tire & Rubber Co. and Pirelli S.p.A., two distinctly different tire companies, are joining forces in the Americas in an effort to boost sales and cut costs. The deal, announced Feb. 12 and effective immediately, calls for Cooper to take over sales and distribution of Pirelli passenger and light truck tires in the U.S., Canada and Mexico, and for the companies to cooperate on raw materials purchasing.

    Cooper expects adding the Pirelli brand to its product range will help it gain a position with larger retail chains and solidify business with existing customers.

    Pirelli expects the arrangement to lead to a doubling of sales of Pirelli-brand tires in North America—to $400 million or more—in two to three years.

    ``Joining together our marketing and manufacturing skills with their product and technology...certainly puts us in the driver's seat to compete strongly and effectively with other companies selling in North America,'' Cooper Chairman and CEO Patrick Rooney said.

    The addition of the Pirelli brand ``will enhance our overall brand awareness and improve our pull-through ability to serve key regional and national accounts that require...`one-stop shopping' from their suppliers,'' Mr. Rooney said.

    The deal could lead to the revival of the Armstrong brand, which still has an identifiable market image and equity, said Tom Dattilo, Cooper's new president and chief operating officer. It also could lead to cooperation in Asia, where neither company currently has a market presence.

    Conversely, the agreement calls for Pirelli to distribute and market Cooper-brand tires in South America in the future. The firms' European activities are not included in or affected by the agreement.

    The deal, termed a ``strategic alliance'' by the new partners, involves no exchange of equity, but could lay the groundwork for more cooperation in the future.

    ``You have to have a little courtship before you have a marriage,'' Mr. Rooney told an investment analysts roundtable.

    The move fortifies both companies' strategic thrusts, said analyst Saul Ludwig of McDonald & Co.

    ``They both want to become more global in the tire industry, (but) they both have weaknesses as far as their global footprint,'' he said.

    Although companies can expand internationally through mergers and acquisitions, joint ventures and partnerships are other ways to achieve that end, Mr. Ludwig said. ``I would not expect there to be any near-term merger. This joint venture will take some time to get up and running.''

    Cooper will benefit from the deal on four fronts, Mr. Dattilo said:

    1) Cooper will be able to target large regional tire dealers with a full range of ``good-better-best'' tires.

    2) Cooper should benefit from increased sales of Cooper and associate brand products through the expanded dealer base it expects.

    3) Cooper will earn a commission (averaging about 4 to 5 percent) on each Pirelli tire sold through its network.

    4) Cooper will be able to buy raw materials at lower cost because of the increased purchasing power the companies' combined resources will command. Cooper executives declined to quantify their expectations for cost savings, but alluded to satisfying goals set forth in the company's ``Cooper 21'' strategy that calls for reducing costs by $40 million this year.

    Under the contractual partnership, Cooper will take complete control of the distribution and sales of all Pirelli passenger and light truck tires in the U.S., Canadian and Mexican replacement markets.

    Pirelli will continue to market, promote and advertise the brand separately, including its motorsports activities, the company said.

    Cooper distributes its products through a network of 6,600 direct and sub-dealers in the U.S. and Canada, although it has a presence with only about 15 of the 75 largest independent tire dealerships, according to Tire Business data.

    The Pirelli brand is a perfect complement to Cooper, according to one of Cooper's larger dealerships, Tire Guys Inc. in Billings, Mont., which also recently added the Pirelli line.

    ``Cooper lacked a real performance product,'' Tire Guys Vice President Earl Spencer said. ``Hopefully Cooper can help Pirelli fill out its lines more completely,...fill in some of the size gaps.''

    ``Cooper definitely is under-represented with larger retailers, like ourselves,'' Merchant's Inc. CEO Michael Riggan said.

    ``But Cooper has an excellent reputation—we deal with them indirectly because of the Hercules brand—and we'd be happy to sit down and listen to their pitch,...see if they can fit our needs,'' he said.

    The agreement does not represent a foray into the original equipment business for Cooper; Pirelli will continue to handle sales with original equipment customers, and for its own part said it will step up efforts for fitments to European cars destined for export to the U.S.

    Pirelli Tire North America, which has finished in the red nine of the 10 years it has been in operation, will realize increased earnings almost immediately through increased U.S. replacement sales and the elimination of a major layer of expense, Mr. Ludwig said.

    Cooper also will work with Pirelli in a consulting capacity to increase manufacturing efficiency at Pirelli's Hanford, Calif., tire plant, but Pirelli will maintain ownership of and responsibility for the facility.

    Manufacturing efficiency at Cooper's car and light truck tire plants in the U.S. is nearly twice that of Pirelli's Hanford plant, measured in tires per worker per day, according to data from both firms.

    Though the companies' European operations are excluded from the agreement, ``we have access to each other's capabilities around the world,'' Mr. Dattilo said, noting that shared process and product technology could make their way indirectly to either companies' plants.

    ``Evolution of the agreement will be evaluated over time,'' said Giovanni Ferrario, Pirelli S.p.A.'s top tire executive. ``At present, it is just a simple agreement. Our philosophy is to find the kind of alliances (that) do not require up-front equity exchange. If you can find alliances like that, you can increase the power of two companies.''

    Pirelli's North American sales slipped 11 percent to $223.7 million in 1997—representing 8 percent of the firm's global tire sales revenue. Last year Pirelli injected $300 million in fresh capital into Pirelli Tire North America to pay down debt and keep it solvent. Results for 1998 will be announced in March.

    Cooper posted 1998 tire sales of $1.44 billion, nearly 90 percent of which came from North America, according to Tire Business estimates.

    Sherri Begin in Detroit and David Shaw in London, both of Crain News Service, contributed to this report.

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