Goodyear: A Go For Lighter Load

Anthony Fontanelle
March 29, 2007

Goodyear Tire & Rubber (GT), a renowned tire manufacturing giant, signed an agreement to sell its engineered-products business for $1.475 billion to EPD, Inc. which is an entity sponsored by the private equity firm Carlyle Partners IV, L.P. The move is the latest effort of the Akron tire maker to recover from its heavy pecuniary losses after struggling to improve production. The investors acquired the Goodyear shares on March 26.

The tire and rubber company's engineered-products business consists of 32 facilities and 6,500 people who make products such as conveyor belts, hoses, and air springs for customers in the automotive, industrial, military, consumer and other related sectors. The company’s tires are known for their compatibility with EBC brake pads and other car parts. Goodyear expects to record increase in sales and profits of this business to Carlyle, but the amount has not yet been divulged. The transaction remains subject to post-closing conditions and adjustments. Additionally, it is also subject to EPD's completion of a labor agreement with the United Steelworkers union.

"This transaction reinforces our focus on our core consumer and commercial tire businesses and on improving our balance sheet," said the company’s CEO, Robert J. Keegan, in a press release dated March 23. Keegan is expecting to use the money for things like debt reduction and growing the tire business. Goodyear will announce the specific details later.

Goodyear had to pay roughly $451 million in debt interest expense during 2006. The amount is a little more than a third of its operating income. Analysts in the industry said that consummating a sale transaction to chip away debt make sense. "If the company used all the proceeds [from its agreement with Carlyle] for debt reduction, we think the transaction would be accretive to EPS," Standard & Poor's equity analyst Efraim Levy said in a research note.

Levy added that the deal could grow Goodyear's earnings per share by sparing the company from interest expense. Citing this as well as expected savings from recent changes in the company's pension plan, S&P upgraded Goodyear's stock to hold from sell. Levy is not the only one on that stand. On March 26, investors bid up the stock 5.3 percent to $31.88 in midday trading on the New York Stock Exchange.

Goodyear, which has became famous worldwide because of its blimp, has taken other steps to recover from its difficulties. In late December, the company managed to end a strike that had started Oct. 5, for example. Goodyear hammered out a three-year pact with the United Steelworkers, in which Goodyear will take steps like closing its Tyler, Texas, plant while moving responsibility for its union retirees' health care to a $1 billion trust.

The transaction is expected to save the company $70 million this year, $240 million in 2008 and $300 million in 2009. But the company lost $358 million during the three months ended Dec. 31, including items like the recently ended strike, compared to a net loss of $51 million during the same period of 2005.

In the interim, Goodyear continues to battle with challenges like improving its global production. CEO Keegan, who took over from Samir Gibara in early 2003, has been steering the company through a slump in the domestic auto industry. Only time can tell how long the road remains bumpy for the distressed company.

Source:  Amazines.com