A Goodyear Tire and Service location in Madison Heights, Michigan.
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Company: Goodyear Tire & Rubber (GT)
Business: Goodyear is one of the world’s leading tire manufacturers, with operations in most parts of the world. The company develops, manufactures, distributes and sells tires for most applications. It also manufactures and sells rubber-related chemicals for various applications. Goodyear is one of the world’s largest operators of commercial truck tire retread and service centers.
Market value: $3.9 billion ($14.02 per share)
Activist: Elliott Associates
Percentage of ownership: ~10.0%
Average cost: n / A
Activist Comment: Elliott is a very successful and shrewd activist investor, especially in the technology sector. Their team includes analysts from leading technology private equity firms, engineers, operational partners – former technology CEOs and COOs. When evaluating an investment, they also hire specialist and general management consultants, expert cost analysts, and industry specialists. They often watch companies for many years before investing and have a large stable of impressive board candidates.
What is happening?
On May 11Elliott issued a letter and presentation to Goodyear’s board of directors, urging the company to appoint five new independent directors, monetize the network of company-owned stores and form an operational review committee to develop a operations and margins improvement plan.
In the wings
Goodyear is an iconic global tire manufacturer founded 125 years ago. It is the market leader in a business that has stable growth, is non-cyclical, and has strong pricing power, making it somewhat immune to inflation. The company sells tires to original equipment manufacturers (“OEM”) and the replacement market, with 80% of its sales coming from the replacement market. Additionally, there is a recent trend with their OEM customers towards more expensive vehicles, which improves Goodyear’s vehicle line-up from entry-level vehicles with lots of international competition to more luxurious vehicles requiring premium tires. – where Goodyear excels. While the OEM market only accounts for 20% of the company’s business, this trend permeates its remaining 80% as people typically replace tires with the same brand.
However, despite these advantages, the stock has significantly underperformed its peers and, relative to the mid-cap S&P 400, it has underperformed 90% over the past five years and 143% over the past ten years. . Much of this underperformance is the result of (i) margin erosion – despite leading scale, its margins are the lowest in the tire industry, behind closest peers Michelin and Bridgestone , around 700 basis points; (ii) underutilized retail platform – the company has approximately 1,025 premium automotive service retail stores, but has failed to leverage its consumer brand to build a platform high-value retail; and (iii) loss of investor confidence – in recent years it has failed to meet its financial targets and has consistently lowered and pushed back its margin improvement promises. As a result, the company is now capital-strapped and unable to capture value-creating opportunities, such as high-return investments to support the growth of its retail store platform.
There are several value creation opportunities here, which Elliott says could result in an additional $21 per share in value. Goodyear has the opportunity to monetize its network of company-owned stores through the sale of approximately 715 stores, the proceeds of which could be used to pay down debt, improve its balance sheet and financial flexibility. These stores generate less than 10% of the company’s revenue and their sale could generate more than $4 per share, while allowing the retail platform to grow under more focused and better capitalized ownership. Another opportunity for the company is to focus on an operations and margin improvement plan. A comprehensive review of Goodyear’s selling, general and administrative expenses could yield at least 114 basis points of margin improvement, while an overhaul of their marketing and branding strategies could result in an additional 271 basis points of improvement. operating margin basis, leading to more than $16 per share value. With its peers Michelin and Bridgestone at 11.5% and 12.2% operating margins respectively, Goodyear has significant room for improvement with its 4.8% operating margins.
In his letter, Elliott states that he “has reached these conclusions after an exhaustive research and due diligence process… has engaged in extensive due diligence with the assistance of consultants, legal counsel and investment bankers. industry leader, and conducted dozens of interviews with former company employees, fellow shareholders and industry executives.” It’s not Elliott going the extra mile, but standard operating procedure for the company. Elliott has a team of analysts, consultants and industry executives that it works with to identify investment opportunities and develop plans to create shareholder value. And this can be seen in his letter and his detailed presentation. The company is not offering a short-term solution involving financial engineering and layoffs (in fact, Elliott specifically states that it is not in favor of more leverage and layoffs), but a long-term, well-thought-out, comprehensive governance, operational, strategic and financial plan that will not only solve the company’s problems, but set it on a long-term trajectory for the benefit of shareholders for years to come. This is the type of letter and plan you want to see from activists and often see from experienced activists like Elliott.
To implement its plan, Elliott is recommending the addition of five new directors to the board. Elliott says it doesn’t want to replace five current directors, but with currently 12 directors, it would take some attrition to avoid having an unwieldy 17-person board. There are certainly several directors who should be ready to move on. Six 12-person board members (including CEO Richard Kramer) have served on the board for more than 11 years. During this time, the company has been serially underperforming with the same CEO who also retained the titles of Chairman and President. I am not ideologically in favor of separating all CEO/Chairman positions. For example, I never had a problem with Warren Buffett as chairman and CEO of Berkshire Hathaway. But when a company is underperforming so severely for 13 years, the board should probably look for a new CEO, but at the very least separate the roles of chairman and CEO. This, coupled with the underperformance and tenure of many directors, makes a compelling case for serious board reconstitution. This is a big company with an iconic brand that just needs a fresh look at the board to reinvigorate the company, help management execute their business plan, and hold them accountable in the event of failure. Elliott said it has identified five new independent director nominees that it believes could help improve governance, strengthen culture and restore investor confidence. The firm has not publicly disclosed the identity of these candidates. Based on its history, we would expect it to be a diverse and skilled group of industry and professional administrators with an Elliott executive. Elliott is currently working out of court with management and recommending potential directors instead of threatening to appoint its own slate of directors. This report will continue for some time as the 2024 director nomination deadline does not open until December 12. We expect Elliott and the company to reach an agreement by then.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments.