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November 23, 2015 01:00 AM

Trelleborg to buy Mitas parent CGS

Bruce Davis
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    TRELLEBORG, Sweden—Trelleborg A.B.'s $1.25 billion offer to buy CGS Holding a.s., parent of Czech agricultural and industrial tire maker Mitas a.s., would nearly double the annual revenue of Trelleborg Wheel Systems and create perhaps the largest agricultural tire and wheel producer worldwide.

    The proposed acquisition, subject to approvals from relevant authorities and expected to be completed in the first half of 2016, also will enhance Trelleborg's position in several other polymer-related business areas, Trelleborg said.

    With manufacturing capacities in Central and Eastern Europe, the U.S. and Mexico, CGS/Mitas “highly complements” Trelleborg's manufacturing footprint and capabilities and is expected to “generate significant synergies and cross-selling opportunities,” according to Trelleborg President and CEO Peter Nilsson.

    “The plan is to gradually integrate the acquired entities into Trelleborg's existing business areas,” Mr. Nilsson said. “We regard the purchase price as attractive given the synergy potential and expected recovery for the agricultural market.”

    The purchase price is equal to nearly $2 per $1 of revenue, with projected cost synergies of about $35 million a year over the coming three years.

    Mr. Nilsson called the deal for CGS a “highly complementary acquisition” and described the Czech company as having “strong and favorably performing operations in agricultural and industrial tires as well as engineered polymer solutions.”

    Adding CGS's Mitas business will establish Trelleborg as a global leader in agricultural tires and reinforce its leading position in industrial tires, Trelleborg said. The firms' combined tire and wheel revenue will exceed $1 billion, making it a top 30 global tire maker and perhaps the largest ag tire producer. North America would represent about 20 percent of that, or close to $200 million.

    Besides doubling tire revenue, the addition of Mitas will broaden Trelleborg's geographical reach and add sales in complementary tire niches, such as pneumatic materials-handling, industrial and construction tires.

    In its statement, CGS called Trelleborg a “trustworthy strategic partner possessing a comprehensive vision” for developing CGS, and said it is “confident that Mitas, Rubena and Savatech rubber manufacturing business will be placed in capable hands.”

    In terms of market position, Trelleborg sees its Trelleborg brand as being on equal Tier 1 footing with Michelin Group at the farm/forestry tire sector, both at OE and in the aftermarket; CGS's Mitas brand competing in Tier 2 with Michelin's Kleber brand, Bridgestone Corp.'s Firestone brand and Titan Tire Corp.'s Goodyear brand; and CGS's Cultor and its own Maximo brands competing with the Alliance and BKT brands in Tier 3.

    Mitas operates tire plants in Otrokovice, Prague and Zlin, Czech Republic; Ruma, Serbia and Charles City, Iowa, the latter of which opened in 2012. Trelleborg has tire plants in Tivoli, Italy; Colombo, Sri Lanka; Xingtai, China; and Spartanburg, S.C., the latter of which started production in mid-November.

    Mitas is performing strongly despite the current downturn in the agricultural market, Trelleborg said.

    Prague-based CGS generated sales of about $630 million with a pre-tax operating margin of 16 percent in the 12 months ended June 30, 2015, Trelleborg said. CGS derives about 46 percent of its revenues from the agricultural tire business, 21 percent from industrial tires and the rest from engineered polymer products.

    Trelleborg said CGS's other industrial polymer businesses—which operate under the Rubena trade name—will enhance its market positions in coated systems, sealing solutions and industrial solutions.

    The acquisition will be financed through committed bank facilities. Trelleborg's leverage initially will be slightly above three times the net debt/EBITDA ratio on a pro-forma basis.

    This is higher than Trelleborg's long-term ambition and the intention is to return to a leverage ratio similar to the levels prior to the acquisition over the next 12-18 months, the Swedish company said.

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