Doublestar set to take control of Kumho

Qingdao Doublestar Group may finally be gaining control of Kumho Tire Co. Ltd.

After nearly a year of offers, Kumho said in an April 1 statement that its management and union have agreed to a plan by the firm's creditors to sell a controlling stake in South Korea's second-largest tire maker to Doublestar.

Doublestar said in an April 10 statement that it and its subsidiary Xingwei Korea Co. have signed a contract with Kumho and its creditor representative, Korea Development Bank, to acquire a 45 percent stake in Kumho Tire through a $607 million private placement.

The transaction will consist of Doublestar purchasing 129.3 million Kumho shares at $4.70 per share and become its controlling shareholder. Doublestar said Kumho operates eight plants, three in South Korea, three in China, one in the U.S. and one in Vietnam, with annual production capacity of 60 million units.

Kumho said the transaction would begin through rights issues in the next three months.

Qingdao, China-based Doublestar has guaranteed that Kumho's management team, based in Seoul, will continue to operate the tire maker independently and build the brand. Kumho said that Doublestar has vowed to invest a substantial amount of capital in the company to get it back on track and profitable.

"Doublestar has guaranteed to allow the Kumho Tire management team based in Seoul to run the business independently and continue to market the brand name," Kumho said in its statement, citing Geely's acquisition of Volvo as an example of how Doublestar-Kumho would be structured.

"In 2010, the Chinese auto maker bought Volvo and focused on investing capital into the Swedish car manufacturer, while allowing for independent management in order to further build the Volvo brand."

Industry impact

Karan Chechi—research director within TechSci Research, a research based management and consulting firm providing market research spanning a wide range of industries, including tires and automotive—said that Kumho's prominence in the passenger car radial segment combined with Doublestar's strong truck/bus radial presence will strengthen their brands worldwide."Kumho has a strong distribution channel spread across the geographies which will help Doublestar penetrate new markets with TBR product offerings," Chechi said in an email.

"We don't see any overlap. Instead there will be increased synergies in the business because of the market segments they cater. Cultural differences can impact the business over the long run but that will highly depend on how the management looks after its employees."

If Doublestar is successful in its bid, Chechi said the tire industry will feel the effects globally.

"The tire industry will witness a new entity competing with some of the biggest players in the business," he said "This deal is said to bring the combined Doublestar-Kumho company among top 10 global tire manufacturers. The product offerings of PCR & TBR and the technology sharing will bring the best of the brand."

The deal marks the second time in the last three years one of the world's 15 largest tire makers was acquired by a Chinese company. In 2015, China National Chemical Corp. acquired Pirelli & C. S.p.A. for about $7.7 billion. Based in Milan, Italy, Pirelli's 2016 sales of $6.38 billion made it the fifth-largest tire company in the world based on Rubber & Plastics News' 2017 Global Tire Report, which ranks the top 75 tire makers. At the time, Pirelli also ranked fifth in the 2015 edition of the report with 2014 sales of $7.99 billion.

Kumho ranked No. 14 in the world in the 2017 Global Tire Report with 2016 sales of $2.4 billion. The firm reported an operating loss of $39.6 million for the nine months ended Sept. 30, 2017, on sales of $1.66 billion. Full-year financials have not been released.

Doublestar was No. 23 on that list with sales of $1.06 billion.

Chechi said Chinese tire companies have opted to acquire established tire companies because of intense competition in the domestic market and antidumping duties imposed on imports of China produced tires by a number of countries. He projects that future Chinese tire makers could follow suit.

"We might see such investments in near future from the likes of Z.C. Rubber and Giti Tire, Nos. 1 and 2 in China, respectively," he said. "These companies are increasing their focus on Southeast Asia and have set up new plants to cater to domestic markets of these southeastern countries."

Shareholder breakdown

KDB is a South Korean state-owned policy bank and part of a consortium that owns a 42 percent stake in Kumho. The consortium's ownership will drop to 23 percent after the deal.In late 2016, Doublestar agreed to buy KDB's stake in Kumho before disagreements over trademark rights and Kumho's profitability eventually led to the cancellation of the deal.

Doublestar said in March that the new price is 30 percent lower than the old price.

Even though Doublestar will control only 45 percent, Chechi said because the rest of the shares are fragmented between other shareholder entities, Doublestar effectively will have controlling interest of Kumho.

Aside from KDB, TechSci said other shareholders include Woori Bank, K.B. Financial Group Inc., the Government of South Korea, Vanguard Group Inc., Moon-wang Kang, Dimensional Fund Advisors L.P., National Agricultural Cooperative Federation, Hana Financial Group Inc. and the National Pension Service of Korea.

Planned investments

Kumho added that additional creditors will invest more capital to cover expenditures to resolve the current debt and liquidity crisis.

"Planned capital investments will be leveraged to stabilize the company and upgrade and expand manufacturing and R&D facilities, augment innovative technology and increase original equipment supply opportunities across the globe," the company said.

Chechi said that Doublestar could take a number of avenues to bring Kumho out of debt. While the firm has not disclosed specifics, Chechi said these could include selling off non-performing assets, cutting down recurring expenses and prioritizing loans to payoff.

"Doublestar also will need to make fresh investment in facilities, products and technologies to revive the brand and increase their share in the tire market," he said.

Kumho echoed this sentiment, adding that it plans to upgrade production lines for eco-friendly tires to better compete in what it described as a highly competitive, technology-intensive segment. It also plans to make its tires more affordable by normalizing production in China and enhancing quality by improving production in South Korea and across the world.

In 2017, Kumho completed a $500 million project to relocate and upgrade separate passenger and truck tire plants to a single site in Nanjing, China.