Michelin Man Primed for Takeovers as Asian Targets Beckon

by Brooke SutherlandAngus Whitley

  

(Bloomberg) -- There’s no better time for the Michelin Man to expand his territory.
Michelin & Cie., the 16 billion-euro ($18 billion) tiremaker, is carrying its lightest debt load in at least 15 years, and its leverage ratio is near the lowest in a decade, according to data compiled by Bloomberg. That puts the French manufacturer in a position to make acquisitions.
Chief Executive Officer Jean-Dominique Senard has said he’d be open to the possibility, particularly in Asia. Producers of lower-tier tires would be logical targets, according to Societe Generale.

“The leeway to make an acquisition is quite good,” Alexis Albert, a Paris-based analyst at MainFirst Bank AG, said in a phone interview. “Everybody is looking at Asia.”
Michelin is set to report a second straight annual drop in revenue after an influx of cheaper Chinese products into the U.S. and cash-strapped Europeans’ preference for budget-friendly options eroded sales. Buying a brand that can compete at lower price points would help the
company capture more market share without sacrificing its premium image, said Kevin Tynan of Bloomberg Intelligence.
JK Tyre & Industries Ltd., a $445 million Indian company, is one possible target that would fit the bill, according to Edelweiss Broking Ltd. Another option is PT Gajah Tunggal, Indonesia’s biggest tiremaker and a company that Michelin already owns a stake in, said PT Danareksa Sekuritas.
Michelin shares were up 1.4 percent to 87.98 euros at 9:59 a.m. in Paris. JK Tyre rose 0.3 percent to 121.25 rupees at 2:26 p.m. in Mumbai. Gajah Tunggal lost 1.4 percent to 1,440 rupiah at 3:49 p.m. in Jakarta.
Representatives for Clermont-Ferrand, France-based Michelin didn’t respond to requests for comment.

Deal Capacity

Michelin had about 2.2 billion euros in debt at the end of June, the most recent date for which information is available, down from more than 4 billion euros at the end of 2010. The company’s ratio of net debt to earnings before interest, taxes, depreciation and amortization is about 0.4 times -- well below the industry median of 1.1 times.
“They do have the capacity if they wanted to look at doing acquisitions,” Richard Hilgert, a Chicago-based analyst at Morningstar Inc., said in a phone interview.
Michelin could spend 1 billion to 1.5 billion euros on a deal without hurting its credit ratings, Michael Foundoukidis of Natixis wrote in an e-mail.

Chinese Tires

The company has struggled in the U.S. as dealers and distributors gobbled up cheaper Chinese tires ahead of anticipated tariffs, said Tynan of Bloomberg Intelligence. The Department of Commerce set preliminary tariffs last month on Chinese tires it said had been unfairly dumped in the U.S. market.
That’s left premium-tire makers such as Michelin with a quandary -- do they start selling cheaper goods to regain market share or hold firm on price and risk giving up volume? The tariffs should help even out the market but there will still be demand for lower-cost options in both the U.S. and Europe. An acquisition could help, Tynan said.
“If you’re only in Tier 1, it’s difficult to address the full market because you’re missing a big chunk of it,” Albert of MainFirst said.

Asia Market

Buying an Asia-based producer has a secondary benefit of giving Michelin a stronger foothold in a growing market, said Edoardo Spina, a London-based analyst at Exane BNP Paribas.
Car sales in Asia will grow faster than any other region worldwide in 2015, according to a Jan. 9 report by Scotiabank.
The most likely targets for Michelin are smaller, local tiremakers, Philippe Barrier of Societe Generale said in a phone interview. China is probably its first pick for acquisitions, Albert of MainFirst said.
The company could also look to India, according to Debashish Mazumdar, an analyst at Edelweiss Broking. While an Indian target may not offer the same scale in Asia as a Chinese producer, it could come with more favorable government regulations and labor laws, he said. Michelin could then use such an asset as a launch pad to reach other Asian markets.

‘Good Choice’

JK Tyre has the largest share of India’s commercial vehicle tire market, where demand is surging, Mazumdar said by phone. Indian tiremakers produce basic-level brands, partly because they spend less on research and development than European counterparts, he said.
“I think India could be a very good choice,” the analyst said. “JK Tyre is a good fit.”
Another option for Michelin is a takeover of Gajah Tunggal, or at least buying a bigger stake in the Indonesian company, Joko Sogie, an analyst at Danareksa Sekuritas in Jakarta, said by phone. Michelin currently owns about 10 percent of Gajah Tunggal, which has a market value in Jakarta of about $400 million.
An acquisition would give Michelin more control of the tires that Gajah Tunggal currently makes for the company’s overseas markets and fulfill its need for an entry-level brand, he said.
A representative for JK Tyre declined to comment on any potential bid from Michelin. A representative for Gajah Tunggal said the company hadn’t so far been approached by Michelin.
Buying its way into the low-end tire market may not pay off for Michelin, said Spina of Exane. The cheaper tires don’t offer the same margins and returns as its namesake brand, and even after U.S. tariffs take effect, the company may still find it hard to compete with Chinese tiremakers that have lower labor and production costs, he said.
Even so, the rush to cheaper options in the U.S. and Europe shows “the average tire is actually a commodity so the price determines who is going to sell them,” Spina said. “If you cannot beat them, join them I guess. That would be the rationale” behind an acquisition.