A rubber industry double-header: Uniroyal takeover, strike talks
Time out has been called in the Uniroyal takeover game. The tiremaker's annual meeting has been adjourned until next Friday while votes are counted on management's anti-takeover measures, intended to keep financier Carl Icahn at bay. Meanwhile, some observers of the rubber industry, like die-hard sports fans who bring a radio to the stadium to follow two games at once, are keeping one ear cocked toward Ohio.
Negotiations are going on there between the United Rubber Workers and the ``Big Four'' US tiremakers -- Goodyear, Goodrich, Firestone, and Uniroyal. The URW's three-year contract expires at midnight Saturday; both sides are hoping for a strike-free settlement.
This year the union is asking for a general wage increase, unlike three years ago, when the tiremakers were reeling from the recession. But any increase is expected to be modest. ``They're being very realistic,'' says Richard Haydon, president of Gabelli & Co., a New York brokerage. ``They're going for job security rather than enhancing their W-2 income.''
That the rubber workers are asking for a wage increase at all is an indication of improved health in the industry -- just as the Icahn takeover bid is a comment on the improved health of Uniroyal, which chairman Joseph P. Flannery is widely credited with turning around over the past few years.
Jean-Claude Gruet, an analyst at Dean Witter Reynolds, dismisses the adjournment of the Uniroyal meeting as a technicality.
But James L. Alexandre, a tire and rubber analyst at Donaldson, Lufkin & Jenrette, says, ``Our observation is that it's very interesting that they chose not to reveal the result of the vote. It's likely that it's either very close, or running against management.''
Mr. Icahn, who owns about 10 percent of Uniroyal, has made a tender offer of $18 a share to acquire about 53 percent of the company. Mr. Flannery has called this price too low and is understood to be seeking a ``white knight.''
Gabelli's Mr. Haydon pegs the value of Uniroyal ``in the low 20s'' per share. ``If a reasonable offer is presented, they will take it,'' he says. But Mr. Gruet says that the fundamental value of Uniroyal is a maximum of $19, noting that he put the stock on his ``sell'' list when it reached 203/8 Monday.
He also says, ``I don't expect a white knight'' to take over. Nor does he expect Icahn to take over the company. ``That's not his game.'' Similarly, Mr. Alexandre calls Icahn's offer ``fairly generous.''
What makes Uniroyal so attractive is not its tiremaking operations but its chemical division. In fact, one of the reasons Gruet feels Uniroyal is unlikely to find a white knight is that the tire operations, which have provided the cash to let Uniroyal expand into chemicals, would be hard to dispose of.
This, in turn, says something about the domestic rubber industry. It has recovered from the recession -- although not nearly so well as the auto industry, to which it is closely tied.
Haydon describes the domestic rubber industry as ``mature, healthy, with a free cash flow.'' Alexandre says of the health of the industry, ``In the near term, it's excellent. . . . Even the marginal producers are profitable.''
But Gruet argues that the industry ``is going through change. . . . It's not in good shape. It's not in catastrophic shape.'' The profit margins are so slim it's possible to sell lots of tires without making much money.
For the long view, the two most important factors are the shift to radials, which means more expensive but longer-lasting tires, produced at more expensive plants, and fierce price competition as imports flood the lower end, particularly, of the market. Firestone spokesman Michael Connor says the median retail price of ``popular-sized tires'' has fallen from $72.71 in 1980 to $53.50 in 1984.
It's perhaps a classic case of a mature manufacturing industry, one in which low-end production, particularly, is migrating overseas to low-wage countries. Meanwhile, US producers, notably Goodyear, are able to hold on to the high end of the market through massive infusions of research-and-development money.
``Last year we spent more on R&D than the other tire and rubber companies combined -- $300 million,'' a Goodyear spokesman says. Goodyear has done particularly well with its ``high performance'' tires -- even selling them to Japan.
Cost competitiveness is clearly a sensitive point within the industry. Asked about the relative positions of US producers, one trade association source said, ``I wouldn't touch that question with a 10-foot pole.''
Alexandre indicates Goodyear is succeeding in its goal to be ``the global low-cost source of high-quality radials -- at its most modern plants.'' This last point is the zinger -- plant modernizations run about $250 million each, Alexandre says, and are upping the outlay required to stay competitive.
The rubber workers have traditionally chosen one ``target company'' -- this time, Goodyear -- with which to work out a ``pattern settlement,'' which is then followed by the others.
But officials at Firestone, which of the Big Four is the least diversified into chemicals and plastics, have declared that ``the days of rich pattern settlements are over'' and announced their intention of seeking a separate contract with the URW.
Curt Brown, a URW spokesman in Akron, Ohio, says, ``We would expect Firestone to respect'' the tradition of the pattern settlement.