Update: Goodyear agrees to meet investment group

AKRON — Goodyear has agreed to meet with representatives from a shareholder group that is calling for significant changes in the way the tire maker conducts business, in an effort to "reverse this period of negative performance and set the company on a path to sustainable value creation."

Elliott Investment Management L.P., a West Palm Beach, Fla.-based investment firm that — together with affiliates claims to represent "approximately 10% economic interest" in Goodyear — sent a letter on May 11 to Goodyear CEO, President and Chairman Richard Kramer and its board of directors, detailing the firm's dissatisfaction with what it calls Goodyear's poor stock performance and outlining three major steps it should take.

The suggestions include:

• Appoint five new "highly qualified" individuals to its board to improve governance and spearhead change;
• Divest its corporate retail stores and use the subsequent capital to pay down debt and improve its financial flexibility; and
• Form an operational review committee to develop an operational and development plan.

"We believe that, taken together, these steps will strengthen Goodyear's financial position, bolster its competitiveness globally and create sustainable value, potentially driving Goodyear's stock price to exceed $32 per share (approximately 179% upside from current levels). Moreover, we believe all of these steps are achievable in the near term," the company wrote.

The letter was signed by Marc Steinberg and Austin Camporin, portfolio managers of Elliott Financial, with $55 billion in assets.

It is unclear if and when the two entities will meet to discuss the letter and an accompanying 40-page presentation, which Elliott Investment calls "Accelerating Goodyear."

"It is an unfortunate fact for Goodyear and its investors that over the past decade, owning Goodyear stock has been a disappointment," Elliott Investment wrote. "We believe the company's poor stock performance is a direct result of its significant margin erosion, suboptimal go-to-market strategy and unfocused brand."

Shortly after receiving the letter, Goodyear issued a statement, saying it valued input from the shareholders and is reviewing the recommendations.

"We intend to meet with them to discuss their views in more detail," the company said in its statement.

Goodyear defended its management, describing its board as having "a strong track record of making value-enhancing strategic decisions on behalf of shareholders.

"We regularly review the company's strategic plan to ensure that Goodyear is best positioned to deliver strong, sustainable shareholder value," Goodyear said in the statement.

"As part of our strategy roadmap, Goodyear continues to strengthen our leadership position in the global tire industry as we advance our connected business model and innovate for the future of mobility."

In heavy trading, the stock price rose to $14.23 on the close of business on May 11, up from $11.72 on May 10, a jump of 21%.

Around 35.5 million shares were traded on May 11, roughly eight times the normal daily volume.

The share price on May 12 closed at $14.67 after opening at $14.15. Trading was brisk at 12.1 million shares.

Even at $14.70, the share price hasn't reached the 52-week high of $15.69 recorded Aug. 15, 2022. The price fell to a low of $9.66 on Dec. 28.

At year-end 2022, Goodyear operated 569 retail tire stores in 38 states and Washington D.C., under the Goodyear Auto Service, Raben Tire and Just Tires brands, with an estimated $540 million in annual sales. Goodyear also operates 160 retail stores in Europe and Asia/Pacific along with 230 Goodyear Commercial Tire & Service Centers in the U.S.

Less than five years ago, Goodyear launched its "Roll by Goodyear" retail tire concept — bringing a retail tire showroom minus service bays to "vibrant lifestyle areas." Today, Goodyear operates two such stores, both in the Washington, D.C. market.

Elliott Investment estimates that Goodyear's consumer retail business alone generates $1.5 billion of annual revenue, with an average of around $2 million per location, and generate as much as $195 million in pre-tax operating income.

Selling the retail stores, Elliot claims, "would generate an increase of more than $4 per share in the company's stock price, while allowing the retail platform to grow under more focused and better-capitalized ownership."

In addition, the investment firm claims that a review of Goodyear's selling, general and administrative (SG&A) costs could drive at least 114 basis points of margin improvement. It also claims that a revision of Goodyear's market and brand strategies "could drive an incremental 271 basis points of operating margin expansion.

"Together, these initiatives could create more than $16 per share of value," Elliott Investment wrote.

Elliott Investment said that Goodyear stock "has meaningfully and consistently underperformed. Relative to the S&P 400, Goodyear has underperformed by 90% over the past five years and 143% over the past 10 years."

The investment firm cited three factors for its perceived Goodyear shortcomings: industry-low operating margins; underutilized retail platform; and loss of investor confidence.

"Despite leading scale, Goodyear's margins are the lowest in the tire industry, trailing its closest peers, Michelin and Bridgestone, by approximately 700 basis points," Elliott Investment wrote.

"Not only has the company failed to close the margin gap versus these peers, but in recent years the gap has continued to widen."

While Elliott Investment didn't offer any opinion on Goodyear's acquisition of the Cooper Tire & Rubber Co., — which recently passed its two-year anniversary — it did take the company to task for its wholesale joint venture, TireHub L.L.C., which it formed in 2018 with Bridgestone Corp.

Elliott Investment pointed to Goodyear's decision to remove its product from American Tire Distributors Inc. (ATD) and instead "push those units" through TireHub.

The investment firm said TireHub faced significant challenges from the outset, including fewer distribution centers than ATD; difficulty with technology; and an inexperienced salesforce.

TireHub now also distributes Cooper-brand products, as well as Mickey Thompson-brand tires and wheels. Mickey Thompson became a wholly owned subsidiary of Goodyear when the Akron-based tire maker acquired Cooper.

Elliott Investment made it clear it wasn't seeking reductions in plant capacity or workforce, or any increases in leverage.

"On the contrary, the changes we are seeking at Goodyear would reduce leverage, accelerate growth and lay the groundwork for a more sustainable future."

The investment firm said it has a "strong conviction in the significant value-creation opportunity achievable," and said that Goodyear, soon to celebrate its 125th anniversary, "plays an important role in the U.S. economy, commands a leading global position, enjoys a strong brand and is poised to benefit from industry tailwinds."

Elliott Investment closed its letter by reiterating its respect for the company and its role in American history.

"We believe that our recommendations — enhancing leadership and oversight, monetizing Goodyear's retail platform, and developing a margin improvement plan — will make Goodyear a better company for its customers, employees and shareholders for decades to come."