A big chunk of the estimated $US3.8 billion global body sealing sector is up for grabs.
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Cooper Tyre and Rubber says it is seeking a buyer for its Cooper-Standard non-tyre operations, which includes sealing, vibration control and fluid handling businesses.
The unit contributed 47% of Cooper group sales in 2003 and 54% of operating profits.
The Ohio-based supplier hopes to conclude a deal by September.
Meanwhile, GenCorp has indicated its GDX Automotive sealing business may not fit into its long-term plans. GDX is No. 2 in the global auto sealing market.
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By GlobalDataCooper could pull in $1.2 billion to $1.4 billion for the Cooper-Standard business, reflecting a five to seven times 2003 EBITDA multiple for the unit. Sales in 2003 were $1.66 billion.
Private equity buyers are expected to lead any bidding. Blackstone, Carlyle Partners and Bain are considered potential acquirers, although a buyer from within the industry can’t be ruled out.
Private equity firms would probably want to dismember the three Cooper-Standard businesses and sell each to a trade buyer. Hutchinson, Metzeler Automotive Profiles and Nishikawa Rubber have been regarded as possible buyers for GDX Automotive and would likely to be interested in Cooper-Standard’s sealing business.
TI Automotive is a major competitor in the fluid handling business as is ContiTech, Veritas and Phoenix. Trelleborg, Freudenberg and Tenneco are major NVH players.
Strategy shift
Cooper’s announcement brings the company’s strategy full circle in around five years.
In the late 1990s, Cooper was looking to diversify its business base away from the troublesome tyre business. It feared being squeezed by the big-league players such as the Goodyear-Sumitomo Rubber combine.
Standard Products was acquired in 1999 and Siebe Automotive in early 2000. These sealing, vibration control and fluid handling businesses were the foundations for Cooper-Standard Automotive.
But Cooper’s board now believes it is time to evaluate strategic alternatives, said CEO Thomas Dattilo.
“We believe that Cooper Tyre & Rubber may best be served by dedicating our resources to investing in our tyre business and further pursuing global expansion,” he said.
Cooper-Standard is one of the world’s top three auto body sealant suppliers. The Cooper-Standard and GDX Automotive businesses have common features but also key differences. GDX Automotive contributed 66% of GenCorp’s revenues in 2003 but just under 6% of operating profits.
“We felt that the performance [in 2003] was poor from our GDX Automotive segment and we are trying to do things now to fix that going forward,” said GenCorp CEO Terry Hall.
Cooper-Standard actually exceeded analysts’ expectations in 2003 and performed better than the tyre operations. It contributed 47% of group revenues but 54% of operating profit. The operating margin was 5.8%, down from 7.4% in the previous year but ahead of the tire operation’s 4.7% margin.
Another key difference is that Cooper-Standard has other significant businesses besides body sealing operations. It claims to be No. 4 in the global fluid systems business, with nearly 10% of the market, and joint-third in NVH control systems, with about 8% of the market.
Just 29% of Cooper-Standard’s sales in 2003 were outside North America, though the sealing systems and fluid handling business are more global. Foreign sales accounted for 38% and 35% of total revenues respectively.
Around 70% of sales go to the US Big Three. GM and Ford generating 14% and 10% of total sales.
Why sell?
Why does Cooper want to shed its apparently successful non-tyre operations? There are some clues in comments in its latest 10K.
“Competition is intense and the segment faces numerous competitors in each of the product lines it serves. In general there are three or more significant competitors for most of the products offered by the segment, and numerous smaller competitors … the segment is facing increased competition for certain of its products, especially for its NVH products, from suppliers producing in low cost countries such as China and Korea.”
Cooper said it was examining how to deal with these competitive threats. It had considered expanding its manufacturing presence to those countries, but now appears resigned to exiting the businesses instead.
The reaction of investors to Cooper’s announcement was positive, with the share price increasing almost 7%.
Although Cooper said it may use net proceeds from any sale to invest in its tire operations, it also noted three other possible uses for the cash – reducing long-term debt from the current $US871 million level; returning capital to stockholders; and repurchasing shares.
Given Cooper’s commitment to expanding US tire manufacturing capacity by three million units in the coming years and expansion plans for Asia, balancing these possible uses may require judicious handling.
FOOTNOTE: On 29 March, Continental announced the intended acquisition of Phoenix, a key player in fluid handling hoses as well as anti-vibration and sealing components. Continental believes this acquisition will substantially enhance the portfolio of its ContiTech subsidiary. Continental’s bid of €15 per share represents a 40% premium to the average Phoenix share price over the last three months. The total acquisition cost, including net debt of €277 million will be around €500 million. Although the Conti bid will have to be blessed by EU anti-trust authorities, the announcement indicates that trade buyers are prepared to acquire suitable businesses that contribute to existing core operations when opportunities arise. Cooper must be hoping that its non-tyre operations attract similar interest.
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