AKRONGoodyear expects the dissolution of its global business alliance with Sumitomo Rubber Industries Ltd. (SRI) to reduce its segment operating income by $10 million to $20 million in fiscal 2016 but increase net income by up to $50 million, Good-year Executive Vice President and CFO Laura Thompson told financial analysts June 5.
The Akron-based tire maker expects the deal to be finalized by the fourth quarter, Ms. Thompson said, so any impact on the firm's finances wouldn't be seen until next year.
She said the positive impact on the bottom line will come primarily from not having to pay dividends in Europe to minority interest partner SRI.
The net effect of the dissolution would be an increase in unit sales volume of about 2 million to 3 million units, Ms. Thompson said, based largely on the anticipated increase in business with the Goodyear brand in Japan, where Goodyear will control the destiny of its brand for the first time in 16 years.
While unit sales would be up, Goodyear estimates the net effect on sales revenue would be a drop of $100 million to $160 millionwith the biggest drop coming in North America, where SRI will be assuming control of the Dunlop-brand motorcycle tire business.
Ms. Thompson also said Goodyear and SRI have agreed to long-term offtake supply agreements in order to ensure a smooth and orderly transition. The company did not provide details of these agreements.
In general, she said the deal will reduce complexities and improve efficiencies in Goodyear's day-to-day operations and provides the company increased flexibility to grow profitably.
Separately, the United Steelworkers (USW) union issued a statement regarding the pending transfer of ownership of Goodyear's Tonawanda, N.Y., plant to SRI.
The USW has a voice in this transaction on behalf of our members and we welcome any employer who recognizes our collective bargaining agreement and its obligations, the union said.
In addition, we welcome any employer who intends to strengthen and grow the business at the Buffalo plant by investing the necessary capital to accomplish those goals and establish the facility as a premier tire producing factory in the United States. We look forward to fruitful discussions with Sumitomo and a bright future for the factory.
For its part, SRI said it is considering its options regarding the establishment of a North American headquarters to oversee its expanded business interests in the region. SRI subsidiary Falken Tire Corp. has a headquarters in Rancho Cucamonga, Calif.
SRI also said it may consider shifting production of Falken-brand tires to the Tonawanda plant depending on the progress of business expansion and needs of the market. The Kobe, Japan-based company also said it likely will be necessary to make capital investments in the New York plant, but said details are not yet decided.
SRI noted it could use a portion of the $271 million it's receiving from Goodyear to invest in the Tonawanda plant. Other uses could be repayment of debts, dividends, etc.
Goodyear investors should view the transaction favorably, according to a report issued by KeyBanc Capital Markets analyst Brent D. Hoselton.
Five reasons were listed in the report:
c The deal will be accretive to 2016's earnings per share by between 15 to 18 cents per share, driven primarily by the elimination of a minority interest in Goodyear Dunlop Tires Europe.
c Goodyear's $271 million to balance out the financial end of the transaction appears fair and generally in line to slightly below a wide range of investor expectations we have recently heard.
c The Akron tire maker's $600 million designated for restructurings previously put in place covers the $271 million cash outlay and the $55 million of debt repayment to SRI within three years of closing appears to be mostly offset by Goodyear's expected sale of 3.4 million shares of SRI stock.
c Goodyear will regain exclusive rights to serve the Japanese replacement and original equipment markets with Goodyear brand tires, while SRI gets Goodyear's 25-percent Dunlop stake and maintains the exclusive brand rights.
c The pact resolves the arbitration process between the firms, which will reduce associated cost and uncertainty.