Last week, The Goodyear Tire & Rubber Co. announced that it has reached agreement with Sumitomo Rubber Industries, Ltd. (SRI) to dissolve the global alliance between the two companies. Goodyear and SRI formed the global alliance in 1999. It primarily consists of four joint venture operating companies, one each in North America and Europe, and two in Japan. The agreement announced today, when closed, would resolve the pending arbitration filed in January 2014. Details of the dissolution are below.
Overview of Agreement
North American Joint Venture
- SRI (currently 25 percent interest) will acquire Goodyear’s 75 percent interest in Goodyear Dunlop Tires North America, Ltd. (GDTNA), which primarily manufactures and sells Dunlop-brand tires in North America, including full ownership of the joint venture’s tire plant in Tonawanda, N.Y.
- Goodyear will retain exclusive rights to sell Dunlop-brand tires in both the consumer and commercial replacement markets of the United States, Canada and Mexico as well as to non-Japanese vehicle manufacturers in those countries.
- In addition to assuming full ownership of the Dunlop motorcycle tire business in North America, SRI will have rights to sell Dunlop-brand tires to Japanese vehicle manufacturers in the United States, Canada and Mexico.
European Joint Venture
- Goodyear (currently 75 percent interest) will acquire SRI’s 25 percent interest in Goodyear Dunlop Tires Europe B.V. (GDTE).
- Goodyear will retain exclusive rights to sell Dunlop-brand tires in both replacement and original equipment consumer, commercial, motorcycle and racing markets in European countries where the current joint venture exclusively serves the market.
- SRI will obtain exclusive rights to sell Dunlop-brand tires in certain countries that were previously non-exclusive under the global alliance, including Russia, Turkey and certain countries in Africa.
Japanese Joint Ventures
- Goodyear (currently 25 percent interest) will acquire SRI’s 75 percent interest in Nippon Goodyear Ltd., which serves the replacement market in Japan with Goodyear-brand tires.
- SRI (currently 75 percent interest) will acquire Goodyear’s 25 percent interest in Dunlop Goodyear Tires Ltd., which serves the original equipment market in Japan with Goodyear- and Dunlop-brand tires.
- Goodyear will regain exclusive rights to serve the Japanese replacement and original equipment markets with Goodyear-brand tires.
- SRI will continue to have exclusive rights to sell Dunlop-brand tires in the Japanese replacement and original equipment markets.
Financial Terms of Agreement
Under the terms of the agreement, Goodyear will pay SRI $271 million upon closing of the transaction, which is expected in the fourth quarter of 2015. The transaction does not impact the company’s existing 2015 and 2016 financial targets or capital allocation plan. The outlay is included in the approximately $600 million designated for restructurings under the capital allocation plan. In addition, Goodyear will repay a pre-existing debt of approximately $55 million to SRI within three years from the date of closing. As a result of the agreement, Goodyear will also sell its 3.4 million shares of SRI common stock.
Goodyear expects the transaction to be accretive to its earnings beginning in the first quarter of 2016, related mainly to the elimination of minority interest in GDTE. Based on the company’s 2015 operating plan, the annual benefit to adjusted net income would be approximately $40 million to $50 million (15-18 cents per share).
The transaction is subject to customary closing conditions, including the receipt of regulatory approvals as well as SRI’s completion of a labor agreement with the United Steelworkers union for the Tonawanda plant.