ChemChina lays groundwork to control Pirelli

Milan, Italy— ChemChina's wholly owned subsidiary China National Tire & Rubber Co. (CNRC) has entered an agreement with Cam Finanziaria SpA (Camfin) to purchase the investment firm's 26.2 percent stake in Pirelli & C SpA.

Italy-based tire maker Pirelli was ranked No. 5 in the European Rubber Journal 2014 Global Tire Report with about $8 billion in 2013 sales. Pirelli reported a slight decrease in sales for 2014, to $7.98 billion.

The two firms disclosed the agreement on March 23 at a price of €15 per share, which at the time converted to about $16.25 and values Pirelli at about $7.7 billion based on about 475.7 million outstanding shares. Camfin's 26.2 percent stake would amount to about $2 billion, with a 50.1 percent share at about $3.86 billion.

Camfin currently is Pirelli's largest individual shareholder and is controlled by the tire maker's chairman and CEO Marco Tronchetti Provera. The transaction is pending antitrust and other relevant authority approvals, and the firms expect completion by the end of summer 2015.

From there, ChemChina is preparing to launch a mandatory tender offer for a majority share of the Italy-based tire maker and potentially take it private to facilitate restructuring.

To do so, the state-owned Chinese firm would need to secure at least two thirds of Pirelli's shares following a public tender offer, which is expected to start after the summer at the same price of 15 Euros per share.

Camfin said part of the agreement calls for ChemChina to integrate Pirelli's industrial tire business—which includes its truck, agricultural and industrial units—into the Chinese firm's Fengshen Tires Stock Ltd. Co. subsidiary, which produces the Aeolus brand. That would create a business with an annual capacity of about 12 million commercial/industrial tires, which Camfin said is double Pirelli's current output.

Neither firm released financial data on the projected industrial tire company, but CNRC's Aeolus subsidiary reported sales of $1.4 billion in fiscal 2013—ranking it 26th on ERJ's 2014 Global Tire Report—while Pirelli's industrial unit accounted for about $2.06 billion in 2013 sales and about $1.86 billion in 2014.

“In the industrial sector, the partnership signed today will allow us to immediately double volumes through integration with some of ChemChina's assets, creating one of the world's top operators in the sector and ensuring for this business and all those who work in it a very strong competitive position,” Tronchetti Provera said in statements addressing Pirelli employees regarding the transaction. A company spokeswoman provided Tronchetti Provera's statements via email.

Camfin to retain stake

Camfin, by re-investing a portion of the proceeds of the sale, will retain a minority stake in Pirelli and is partnering with ChemChina in the bid. Tronchetti Provera will continue to serve as CEO of Pirelli and oversee the restructuring process, expected to take four years. However, he would relinquish his chairman's title so ChemChina can appoint its own.

“We are delighted with the opportunity to team up with Mr Marco Tronchetti Provera and his team to continue to build together a world-class organization and a market leader in the global tire industry,” Ren Jianxin, chairman of China National Chemical Corp., said in a statement.

Tronchetti Provera added that ChemChina valued Pirelli's ability to produce tires of very high quality and that the Chinese firm has no intention to interfere in the operational management of the group.

“The agreement with the Chinese will have no impact on employment, but in fact the opportunity with a partner like ChemChina is for the company to become bigger and to have a more effective penetration of the Asian market,” Tronchetti Provera told Pirelli employees. “Our factories and employment in general can only benefit from the entrance of a new shareholder.”

Pirelli's shareholder structure

Pirelli's tire sales accounted for 98.1 percent of its total in 2013, according to ERJ's Global Tire Report. The Italy-based firm produces car, motorcycle, truck, bus and agricultural tires with 19 plants in 13 countries and a commercial presence in more than 160 countries. Its passenger car and motorcycle tire units comprise its consumer business, with 2014 sales accounting for 77 percent of its total at $6.12 billion.

ChemChina reported sales of $39.4 billion in 2013 and is considered China's largest chemical company. According to its website, it operates in six sectors: new chemical materials, basic chemical materials, oil processing, agrochemicals, rubber products and chemical equipment.

China National Tire & Rubber touts itself as China's largest producer of off-the-road tires with Aeolus Tyre Co., ChemChina Guilin Tire Co. Ltd, Double Happiness Tire Industrial Co. Ltd and Qingdao Yellowsea Rubber Co. Ltd among its holdings.

Multiple advantages

According to Edoardo Spina, automotive and tire analyst for Exane BNP Paribas, Pirelli offers ChemChina a number of advantages: Access to technology in both the design and the process of making consumer and industrial tires at the Tier 1 level, a well established global brand and strong ties with original equipment customers.

“The Chinese would not have access to all this information on their own,” Spina said. “It would take decades for them to get this kind of insight.”

He said ChemChina can invade the markets of Europe, North America and China with quality products that are potentially cheaper than any equivalent product, with an immediate impact on the truck side given that Aeolus already has a strong established market presence.

But Spina said the real value is on the consumer side.

“You create a new player with a top brand in Pirelli and Tier 2 and Tier 3 brands in China,” he said. “It sounds like exactly what the market has been looking for in the last 10 years.”

Pirelli gains a stronger partner in China with which to do business. Spina sees most of the upside generating from its consumer tires business. The acquisition also could clear a path for Tronchetti Provera to exit the business cleanly.

He said he doesn't foresee the firms facing any regulatory issues in getting the deal approved given the size of market share that the Chinese currently hold.

Long road ahead

While ChemChina's purchase of Camfin's 26.2 percent stake is expected to proceed without any problems, Spina said the Chinese may have a difficult time gathering the necessary ownership stake to de-list Pirelli if it intends to make the same offer as it did for Camfin's stake.

Camfin said ChemChina intends to value its mandatory tender offer at €15 per share. Spina said he doesn't believe that will be enough to get the shares unless the market goes down 10 or 20 percent between now and the time of the offer.

“They seem to have decided on kind of a low price,” Spina said. “Based on how the market currently is, the offer is not that attractive. It could be problematic to get the shares at this price, assuming the financial markets don't collapse. They may have to pay more, assuming they really want to de-list Pirelli.”

A de-listed Pirelli would not be required to share any financial or strategic information with the market, meaning it could move much quicker with the de-merger of its industrial tire unit and any sort of restructuring plans it may have with regards to Pirelli's technology.

Under the agreement, Camfin said ChemChina would need a 90 percent vote from the shareholders in order to relocate Pirelli's headquarters and R&D from Italy or to transfer technologies to third parties.

According to Camfin, ChemChina's offer of $16.25 per share reflects a premium of about 28 percent compared to the average trading price of Pirelli's ordinary shares for the past six months and 18 percent during the past three months ending March 20. However, Pirelli's shares closed at about $16.62 on March 20, the Friday before the deal was announced.

Investor structure

Regardless of whether or not ChemChina's tender offer succeeds, Pirelli will have three primary investors, each holding a designated portion of the holding company “Bidco” that will contain Pirelli's shares. ChemChina always will hold at least a 50.1 percent stake in Bidco with a maximum stake set at 65 percent, according to Camfin's statement.

Bidco will have two primary minority investors:

• Camfin, which will have become a company entirely controlled by Coinv SpA, an investment company indirectly controlled by Tronchetti Provera with Intesa Sanpaolo SpA and UniCredit SpA each holding a 12 percent share—at no less than 22.4 percent and no more than 31.9 percent; and

• Long Term Investments Luxembourg SA —a private Russian investment company—at no less than 12.6 percent and no more than 18 percent.

A de-listed Pirelli would have a board composed of 16 directors, eight including the chairman appointed by CNRC and the remaining eight including the CEO appointed by Camfin and LTI, according to Camfin.

If Pirelli remains listed, Camfin said it will maintain its existing governance with 15 directors—four independent, CNRC designating eight including the chairman and CEO/Executive Vice Chairman Tronchetti Provera as long as he is in the office, four designated by Camfin and LTI, and three by the minority slate.

Camfin said the transaction is to be financed by the parties involved and JP Morgan Chase & Co. will underwrite the acquisition financing commitments.

Details of the Pirelli acquisition plan

Purchase price: About $2 billion ($16.25 per share) for Cam Finanziaria S.p.A.'s 26.2 percent stake in Pirelli. The offer would place the total value of Pirelli at about $7.7 billion.

Expected close: End of summer 2015; once complete ChemChina would launch a tender offer in an attempt to delist Pirelli for restructuring purposes.

Sales: ChemChina reported annual sales of $39.4 billion in 2013; Pirelli reported tire sales of about $7.98 billion in 2014 and ranked fifth in Rubber & Plastics News' 2014 Global Tire Report with 2013 sales of about $8 billion.

Employees: Pirelli employs about 39,000 worldwide; ChemChina says it has about 120,000 employees throughout all of its units.

Product Lines: Pirelli produces car, motorcycle, truck, bus and agricultural tires with 19 plants in 13 countries and a commercial presence in more than 160 countries.

ChemChina is active in six sectors—new chemical materials, basic chemical materials, oil processing, agrochemicals, rubber products and chemical equipment.

China National Tire & Rubber touts itself as China's largest producer of off-the-road tires with Aeolus Tyre Co., ChemChina Guilin Tire Co. Ltd., Double Happiness Tire Industrial Co. Ltd. and Qingdao Yellowsea Rubber Co. Ltd. among its holdings.