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Carlisle explores divesting its tire, wheel subsidiary

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CHARLOTTE, N.C.—Carlisle Companies Inc. is exploring the option of divesting its Carlisle Transportation Products (CTP) segment—including the firm's industrial, consumer and agricultural tire and wheel businesses—after determining the unit is “not core to Carlisle's growth strategy.”

To determine the business unit's future, Carlisle has engaged SunTrust Robinson Humphrey Inc. of Atlanta as financial adviser to assist in evaluating “strategic alternatives,” company executives disclosed recently. Should Carlisle determine that divestiture is the best option, financial analysts who follow the firm project the business could generate a sale price in the range of $350 million to $450 million.

The unit—which also includes the firm's power transmission belting business—reported sales of $778 million and operating income of $52.4 million in fiscal 2012. The tire and wheel business represents an estimated $375 million to $400 million of that total. Divesting the tire business would separate Carlisle from its historical roots.

The company was founded in 1917 in Carlisle, Pa., as an inner tube producer. Carlisle disclosed its decision in its second quarter financial results, released July 23. In announcing its decision, Carlisle said it believes the CTP business has stabilized after several unsteady quarterly performances and the outlook is “favorable.” “While we are optimistic about the future for CTP,” the company said, “it is not core to Carlisle's growth strategy.”

In comments to financial analysts during the second quarter conference call, David Roberts, Carlisle chairman, CEO and president said, “...despite our efforts to improve the margins at CTP, the probability of it becoming a consistent double-digit margin performer was going to be a challenge.

“Consequently, we deemed that CTP is no longer a strategic asset.”

For the quarter ended June 30, the segment reported 3.7-percent lower sales of $203.5 million and operating income dropped 32 percent on the negative effects of lower sales and continued inventory reduction measures. Carlisle also took a non-cash, pre-tax loss of $100 million in the quarter to account for the “goodwill impairment,” reflecting management's decision to reduce the unit's estimated fair value based on the recent increase in interest rates, which resulted in Carlisle's using a higher rate to discount CTP's projected cash flows.

For the first six months of fiscal 2013, CTP reported sales of $430.9 million and an operating loss of $72.9 million, reflecting the goodwill impairment. Regarding the possible divestiture of the business, Mr. Roberts said the decision to explore strategic alternatives for Transportation Products “was not an easy decision,” noting Carlisle owes its “very existence to the tire manufacturing business.... “Despite our origins being embedded in the tire business, our strategic objectives have changed for the business over the past six years. We've invested in CTP and given it every opportunity to be a core business, but it just doesn't have the characteristics that fit with our overall corporate goals.”

The Carlisle executive said the firm has had some inquiries about the business, but he thinks the process could take up to nine months to complete. Neil Frohnapple, a securities analyst with Northcoast Research, said he could see the CTP business bringing in from $350 million to $400 million, with the most likely buyer a private equity firm. He based his estimate on multiples of five to six times EBITDA that other firms brought in recent mergers and acquisitions activity.

“They'll try to get at least book value,” he said. “It generates solid cash.” Company officials have been somewhat disappointed that its restructuring efforts didn't do a better job of boosting the unit's margins, Mr. Frohnapple said, so now is a good time to shop it with the business showing some financial improvement.

Ivan Marcuse, analyst with KeyBanc Capital Markets, estimated that Car-lisle could get $400 million to $450 million for CTP, according to a note he published after the conference call. He based the projection on the 5.5 times EBITDA that Apollo Tyres Ltd. has agreed to pay for Cooper Tire & Rubber Co. Asked about the possibility of selling the unit's tire, wheel and belting businesses separately, Mr. Roberts said: “...at this point, we would want to sell the entire business. I don't think we'd ever separate wheels and tires. “There's been some conversation about could we sell the belt business separately. It is a free-standing business compared to the tire business. That's an option for us. But as of today, we want to market the entire business.” Carlisle in the past few years revamped its tire business, moving production from its traditional home in Carlisle, Pa., to a converted plant in Jackson, Tenn., in a project that cost $65 million.

Carlisle also moved some tire/wheel assembly business from a fire-damaged plant in Bowdon, Ga., and some tire production from Buji, China, to the new plant. It has a second tire factory in Clinton, Tenn., and continues some production in China as well.

Carlisle had considered selling its belting business in 2008-2009 but eventually decided to keep it and combine it with Carlisle Tire & Wheel to form CTP. Carlisle was founded in 1917 by Charles S. Moomy, who opened Carlisle Tire & Rubber Co. in the town of the same name to produce and sell inner tubes to Montgomery Ward & Co., according to Carlisle's history on its website.

Bruce Meyer, Crain News Service, contributed to this report. To reach reporter Bruce Davis: bdavis@crain.com; 330-865-6145.

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