Goodyear Tire & Rubber Co. has some big plans to become smaller, with more focus and a stronger balance sheet that is burdened by less debt.
Analyst: Now is a good time for Goodyear to divest assets
“No stone was left unturned as we analyzed the future landscape to design the optimal path for Goodyear’s future,” CEO Rich Kramer told analysts in a Nov. 15 presentation, noting the company believes the assets would bring in gross proceeds in excess of $2 billion.
The moves would likely be, as Goodyear suggests, “transformational” for the company, which would use the new cash to pay down debt but also to bolster its sales and brands.
Any sales would come as Kramer prepares to step down in 2024—and no successor yet in place.
Goodyear’s Chemical division has its research and development based in Akron, as well as multiple operations in Texas and other locations.
All of these operations are connected via research and development and other functions, of course, so Goodyear will need to disentangle them as they’re sold, assuming the company is successful in its sale efforts.
The biggest determining factor in how the sale of these businesses impact the economy of Northeast Ohio, where Goodyear has employees, supply chain partners and customers, will likely be determined by what sort of buyers emerge and prevail.
A corporate strategic buyer would likely have the back-office functions necessary to support a new purchase. That means it might not need some of the accounting, marketing, and other corporate functions that those companies have now, or are provided by Goodyear. Such scenarios often result in at least some job loss.
On the other hand, a financial buyer that does not own another corporation into which an acquisition can be integrated might actually need more people to take over those same functions, especially if it purchases an operation and keeps it as a standalone company.
Both types of buyers are active in the market today and becoming more so, said J.R. Doolos, managing director at KeyBanc Capital Markets.
“The sentiment has been very favorable over the last quarter and in particular over the last month,” Doolos said. “You’re going to get private equity a lot more involved than they have been … Now that we have some perception that interest rates are going to be stable, they’re going to reenter the market and be aggressive buyers.”
The presence of more buyers, of any type, tends to drive up prices for companies and corporate assets, Doolos said. While he declined to comment on Goodyear’s prospects specifically, he said now is a much better time, generally, to be divesting corporate assets than it was a year or even a few months ago.
Valuations peaked in 2021 and then came down sharply as interest rates rose. Doolos said companies and operations that might have fetched a multiple of up to 10 times EBITDA saw those valuations fall to perhaps 8.5 times EBITDA in 2022 and early 2023.
But since then, those valuations have started to come back up, and Doolos said he expects them to continue to rise in 2024.
“We are trending more towards a normalized market environment, but we’re not quite there. The expectations are that we’ll get there but not until 2024,” Doolos said. “We’re certainly through the trough, which I would say was early ’23.”
If Doolos is correct, it would seem Goodyear has timed its planned divestitures well.
Its transformation plan, of which the divestitures are a major feature, has largely been embraced by analysts. But they also say it’s tough to judge the decisions the company is taking, which surprised some analysts.
“It’s hard to have a view if it’s smart or a mistake. But my view is they looked at all these different aspects of their business … so it doesn’t surprise me that there are parts of it over time that became less core,” said John Healy, who covers Goodyear for Northcoast Research in Cleveland.
“Goodyear is a company that’s gotten a lot smaller over the past 15 years or so.”
The sales also make sense because the multiples Goodyear is likely to realize on the sales are higher than on Goodyear itself, which trades in the low- to mid-single-digit range relative to EBITDA, Healy said.
Writing after the Nov. 15 presentation, JP Morgan Analyst Ryan Brinkman said it came as no shock that Goodyear announced it planned to sell major assets – but the assets it picked were a surprise.
“While many investors had expected the company to announce the sale of strategic assets today (likely including the sale of company-owned tire retail stores and adjoining auto care centers), the planned divestiture of each of the Chemical, Dunlop, and OTR businesses likely came as a surprise,” he wrote.
But Brinkman said the operations Goodyear has decided to sell should bring in more money than the sale of its retail operations, something Kramer said was important to keep.
One happy group – and it might be the most important group - is Elliot Investment Management, the activist shareholder group that in recent years has muscled its way onto Goodyear’s board and has demanded the company improve.
“We believe the ‘Goodyear Forward’ transformation plan represents a significant set of steps toward a stronger and more profitable Goodyear," senior portfolio manager Marc Steinberg and portfolio manager Austin Camporin wrote in Goodyear’s press release unveiling its plan.
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