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November 07, 2005 01:00 AM

Altering the landscape

Lisa Hockensmith
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    As Sumitomo Corp. of America (SCOA) was looking to enter the retail tire market in the U.S., its interest initially was in buying National Tire & Battery (NTB) from TBC Corp., according to documents filed by TBC.

    But in the end, SCOA ended up offering to buy the entire company, adding a major wholesaler to its stable, which already included Treadways Corp.

    In September SCOA and TBC announced the former was buying the Palm Beach Gardens-based wholesaler, private brand marketer and retailer for about $1.1 billion, including $35 per share in cash plus debt. The transaction is expected to close by year-end. TBC and Treadways will continue to be run as separate companies under current management.

    In a letter to shareholders, TBC President and CEO Larry Day, who will continue to head TBC, said the board has recommended its shareholders approve the deal at a special meeting at 10 a.m. Nov. 15 at Tire Kingdom Inc.'s headquarters in Juno Beach, Fla.

    ``After careful consideration, our board of directors has unanimously determined that the merger agreement and the merger are advisable, fair to and in the best interests of TBC and its shareholders,'' Mr. Day wrote.

    In further information submitted to the Securities and Exchange Commission, TBC recounted the background of the deal.

    TBC said SCOA's financial adviser, Tri-Artisan Partners L.L.C., contacted TBC advisers in May to ask ``whether TBC would have any interest in selling either its National Tire & Battery stores ... or TBC as a whole,'' the documents said. TBC had bought 225-outlet NTB in 2003 from then-Sears, Roebuck and Co. for $260 million.

    Later in May, Mr. Day met with Hirohiko Imura, senior vice president of SCOA, to discuss the matter. ``Mr. Day noted that TBC was pleased with the NTB acquisition and would probably not consider selling NTB,'' according to the documents.

    Tony Cristello, an analyst with BB&T Capital Markets in Richmond, Va., said TBC likely didn't want to sell just NTB because it had put so much work into the acquisition and integration, which hit some snags along the way and proved time-consuming.

    Removing NTB from TBC's retail arm could cause some disruption, Mr. Cristello speculated, and it also could open the door for a competitive threat to TBC's remaining retail holdings, including Tire Kingdom, Merchant's Inc. and Big O Tires Inc.

    ``It basically leaves the door open for Sumitomo at some point becoming a competitor,'' he said.

    The companies continued to discuss the deal throughout the summer. In July, SCOA's first offer was for between $31 and $33 per share, but by August that figure was negotiated to $35 per share. In September, SCOA indicated it was not willing to go higher than $35 per share, the filings said.

    Mr. Day told Tire Business that he was unable to discuss more details of the deal before it's closed.

    TBC said in its filing that some benefits of the deal included the fairness of the offer but also the relief of TBC as a stand-alone entity. Some uncertainties facing TBC on its own would be the impact of rising gas prices, which could result in reduced annual mileage and less disposable income for consumers, as well as increasing raw material prices and related challenges of passing along the pricing.

    The purchase price also is at a premium to TBC's stock price. The price was a 34-percent premium on TBC's stock price the day before the deal was announced, and it is a 15-percent premium over TBC's 52-week high of $30.44. The price is even a 13-percent premium over TBC's all-time high of $30.90, hit in April 2004.

    Among the risks of the deal considered by TBC was the cessation of being a public firm in which shareholders will no longer participate.

    Mr. Cristello said the arrangement is a ``great deal'' first because of the price.

    ``Secondly, I think now it gives them the opportunity to be able to grow and be able to make acquisitions and do some creative things without having that accountability to the street,'' he told Tire Business. ``It gives them a little bit more flexibility in respect to that.''

    In fact, he expects TBC to be more aggressive in terms of acquisition as a result of this deal. If the NTB acquisition had gone a little smoother, he said he thinks TBC would have been back in the acquisition field by 2006.

    ``As long as SCOA is going to be willing to let them continue to operate as they normally would, then I would expect TBC to be once again a more aggressive competitor with respect to acquisitions,'' Mr. Cristello said.

    He said he also believes there's much more room for organic growth in TBC's retail arm.

    But while the deal has focused primarily on the retail side, the company's wholesale side could see some changes in the future. In terms of tire unit sales, SCOA's combination of Treadways and TBC forms a massive wholesaler.

    Mr. Cristello said both TBC and Treadways have many followers for their private brands, and only time will tell if SCOA plans any changes to their structures.

    ``We're probably a couple years away before you see them coming and making any kind of big changes,'' he said.

    SCOA may in the future decide to merge some aspects of Treadways' and TBC's wholesale divisions, Mr. Cristello speculated. But that option also would be dependent on several factors, including tire dealers' feelings about that or market overlapping among the private brands.

    ``It may not be immediate...but you've got to believe that operating the two companies separately at some point may not be the right strategy,'' he said.

    At the time the deal was announced, a SCOA spokeswoman said no changes were anticipated in the short term.

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