Having posted better than expected trading results at the end of June, National Tyre & Wheel (ASX: NTD) came to the market today to announce it will acquire the assets of wholesale tyre business Tyres4U (T4U) in Australia and New Zealand for around $49 million.
The tyre supplier said it will fund the purchase with $43.6 million in cash and the issue of close to 12 million shares at $0.43 per share.
T4U has been operational since 1990, now with around 450 people on its books. The company imports and wholesales both tyres and wheels for a range of vehicle types in Australia and New Zealand, as well as operating a retail business in Australia with over 60 stores under its own brand or under a licensed franchise model.
The company’s wholesaling business is conducted from 15 locations in Oceania.
The acquisition is set to deliver a larger entity with a combined annual volume of more than 2.5 million unit sales and combined annual revenues of around $450 million.
According to market analysts, the transaction will create one of the largest tyre wholesalers in Oceania and the largest independent multi-branded wholesaler in the region.
Meeting at the apex
National Tyre & Wheel chief executive officer Peter Ludemann described the deal as a “testament to the power of belief and persistence”, given that both companies had no prior business contact with each other despite operating in the same niche industry for more than 25 years each.
“Different business models, different products and different routes to market made it immediately obvious that everyone could benefit from getting together, without disturbing our core businesses or values,” he said.
“I’m really pleased to have found a way to do that – even though the tyre industry has proved to be resilient over the past few months, there can hardly be a better time to turn diversity and scale into a better outcome for our suppliers, customers, people and shareholders,” Mr Ludemann added.
The strategic rationale behind the deal is for National Tyre & Wheel to diversify and upscale through value accretive acquisitions.
According to the company, diversification reduces its overall risk while a broader product mix is likely to appeal to its customer base.
Moreover, the company expects upscaled operations to support better service levels, generate more buying power with foreign manufacturers and lower costs.
In a market statement, National Tyre & Wheel said the acquisition is a “logical extension” of its strategy given that T4U operates in key industry segments in which it currently has limited market penetration – namely, truck and bus tyres, industrial tyres for fork trucks and agricultural/off-road tyres.
Conversely, T4U is admittedly passive in the four-wheel-drive segment, where National Tyre & Wheel appears to be best equipped given recent sales figures.
While both businesses focus on tyre specialty retail customers, there are opportunities to cross-sell and expand into other channels, National Tyre & Wheel said. Another advantage for the company is the acquisition of supplier relationships given the pair currently have no common suppliers.
A seamless merge process
Concerning integration, National Tyre & Wheel said it expects the process to be “seamless” due to operations being fundamentally the same despite nuanced differences in products and customers.
Post deal completion at the end of July 2020, the company is set to operate 30 distribution centres in Australia, New Zealand and South Africa and serve more than 4,000 retailer customers.
T4U chief executive officer Les de Celis said he met with Peter Ludemann and other National Tyre & Wheel representatives “some years ago” to discuss the prospects of a merged business. “We were very enthusiastic back then about the benefits we could deliver to suppliers and customers with an abundance of complementary skills in our teams and no significant overlap of products or suppliers,” he said.
“Changes in the industry since then have only made the case for getting together more compelling and we are extremely excited to join forces with National Tyre & Wheel,” Mr de Celis added.