Analysts see good signs in Goodyear-Cooper deal

FINDLAY, Ohio — Goodyear's pending $2.5 billion takeover of Cooper Tire & Rubber Co. is a deal stockholders in both companies should feel good about, according to one stock analyst.

In buying Findlay-based Cooper, Akron-based Goodyear gains a deeper penetration into the replacement tire market that could help boost its distribution business, TireHub L.L.C., according to James Picariello, a stock analyst with Keybanc Capital Markets Inc.

Cooper also has what is known as a net cash balance sheet, meaning the company has about $300 million in cash to bring to the combined company while not adding any debt, he said.

"It's unusual for a company to have net cash. There are companies out there. Usually there's some leverage on the balance sheet. In Cooper's case, they don't have that net leverage," Mr. Picariello said.

This financial position meant the company was attractive to suitors.

"They happen to have a net cash balance. That spells takeout target to me. Especially in this current environment with tariffs," he said.

Foreign producers facing duties on their imports into the U.S. potentially could have targeted Cooper as a way to gain production capabilities on U.S. soil to avoid those payments, Mr. Picariello said.

"Was this a preemptive move by Goodyear to acquire the Cooper assets before someone else who is affected by the tariffs?" he asked.

Cooper shareholders are getting $54.36 per share in cash and stock in the combined company, a 24% premium over the price on Feb. 19, the last business day before the deal was announced.

The deal includes $41.75 in cash and 0.907 share of Goodyear stock per Cooper share. Once the transaction is complete, current Cooper shareholders will own about 16% of the combined company.

"They are getting a great deal. I haven't talked to a single Cooper Tire shareholder who is upset with the deal. Not a single one," Mr. Picariello said.

"In fact, those same people not too long ago were talking about the stock at 20 bucks and hopefully getting to 25. We're in a good place right now for Cooper Tire."

Analyst Bret Jordan of Jefferies L.L.C. pointed to the favorable stock-market reaction, where shares of both companies rose on news of the deal, as proof that Wall Street likes the purchase.

Neither Mr. Jordan nor Mr. Picariello said they expect any antitrust issues emerging with the transaction. With Cooper mostly in the replacement market, there's no concern on the original equipment side of the business, and combining the companies' replacement business will put its share of that market at close to 20%, maybe a bit more, of the total. That's in line with existing competitors.

Pushing Cooper-brand tires through TireHub, the joint-venture wholesale distribution business Goodyear owns with Bridgestone Americas Inc., will help the economics of that portion of the business as well, Mr. Jordan said.

"Having some more product to put through that fixed overhead is probably not a bad thing," he said about the TireHub business.

Along with distribution savings, Mr. Jordan also sees supply chain improvements as well as a cut in corporate costs through the elimination of duplicate positions once the two organizations combine.

Goodyear has identified $165 million in "run-rate" cost savings within two years of the deal closing. The majority of that cash will come from eliminating or reducing corporate functions and gaining operating efficiencies, Goodyear said.

"I would expect a fair amount of corporate overhead reduction, likely on the Cooper side," Mr. Jordan said.

Another important aspect of the deal is $450 million in tax credits Goodyear already is sitting on and will be able to use when the deal closes. This added tax benefit, which other potential buyers do not have in their hip pocket, puts Goodyear into a stronger buying position, the analysts said.

While restricting as one company comes with its own set of costs, Goodyear said the deal will be immediately accretive. That's Wall Street's way of saying the larger company will be more profitable from the get-go. It also slightly improves Goodyear's balance sheet.