NEW YORK—China National Chemical Corp. (ChemChina)'s bid to take control of Pirelli & C. S.p.A. is first and foremost a deal to secure the future of Pirelli's commercial tire business interests, Pirelli CEO Marco Tronchetti Provera told Tire Business in a recent conference call.
Combining Pirelli's truck and farm tire assets with those of ChemChina's National Tire & Rubber Co. subsidiary will create an entity that Mr. Tronchetti Provera said would be the fourth largest commercial tire business globally. Tire Business estimates this entity would generate sales of about $3 billion annually.
Throughout a half-hour conference call on April 2, Mr. Tronchetti Provera stressed that Pirelli's consumer tire business—car, light truck/SUV and motorcycle—would remain separate from any of ChemChina's operations.
“ChemChina is not a tire company,” the executive said. “ChemChina will not have a penny in Pirelli directly.”
He stressed that Pirelli's strategy of producing locally for local consumption will continue, noting the billions of dollars of investment the tire maker has made in modern plants in China, Italy, Mexico and Russia.
Mr. Tronchetti Provera also confirmed that the deal to merge the industrial tire assets of the two companies would go forward—no matter what. The combined entity would possess annual capacity for 12 million truck, farm and industrial tires at plants in Argentina, Brazil, China, Egypt, Italy and Spain.
More than half that capacity would be in China, he added, noting that bringing Pirelli technology to the partnership with ChemChina's Fengshen Tires Stock Ltd. Co. unit would help improve casing integrity and elevate retreading in China. Fengshen Tires produces the Aeolus brand.
Pirelli presaged a spin-off of the industrial tire business a year ago when it agreed to sell its steel-cord business—annual sales of $410 million—to Belgium's N.V. Bekaert S.A., thus clearing the business of non-essential assets.
Mr. Tronchetti Provera said he expects the deal to go through by June or July and to be cleared by September/October.
Addressing stock market concerns about whether ChemChina's bid of 15 euros per share ($16.15 at prevailing early April exchange rates) is sufficient, Mr. Tronchetti Provera stressed that that bid is “solid and fixed,” and he's confident that after the market speculation wanes, the bid will prevail.
In an analysis published by Exane BNP Paribas, analyst Edoardo Spina said his company sees the 15 euro bid as too low and anticipates that ChemChina's partner Camfin S.p.A. will find it difficult to acquire enough shares to attain the required shareholders' approval level of more than 90 percent.
Mr. Spina said Exane BNP values the share price measurably higher, especially if the lower-performing industrial division is hived off and shareholders are dealing with the more highly profitable consumer side of Pirelli.
Mr. Spina did, however, cite two weak links in Pirelli's armor—Russia and Latin America, where the firm's operations are facing difficult economic conditions, which could put pressure on earnings and shareholder returns.
Exane BNP said it would not rule out a counterbid by a competitor, “given the risks to volume, pricing and ultimately earnings for virtually all incumbents except Pirelli.”
Other comments:
c The uneasy political situation in Russia—where Pirelli has made a measurable investment to buy into and expand manufacturing capacities for the Russian/Eastern European markets—did not influence the decision to pursue the business deal with ChemChina.
c Pirelli is not concerned that being controlled by Chinese investors will have any negative effect on the consumer tire business. “We have a very strong presence in the prestige markets,” Mr. Tronchetti Provera noted, “and supply the top vehicle makers globally, including in China.”
c The deal should have no effect on Pirelli's motorsports engagements, including its exclusive supply arrangement with Formula 1, which runs through the 2016 season.
Mr. Tronchetti Provera stressed that the provisions of the ChemChina deal call for him to remain CEO for five years and that he will be able to re-list the company's stock in four years.
He also indicated that it's possible Pirelli Tire North America Inc. could add Pirelli-brand truck tires to its mix under the new structure, but that would be a long-term decision.