Sketchbook from Geneva - the Amtel crisis

By David Shaw, ERJ editor

Unlike previous years, there was no dominant tyre story from Geneva Auto salon this year. Of the different stories, possibly the most interesting is the potential break-up of the Amtel-Vredestein tyre operation. I have to note in the following piece that much of it is speculation and most of the sources must, of necessity, remain anonymous. This is not a news story, but a piece of commentary and my own personal opinion.

Amtel-Vredestein is in deep financial trouble. The company has acknowledged that it needs to restructure its finances quickly and has sought external help to do that. In the current financial market, however, any company that wants to raise some $1000 million in the short term, but has few real assets, faces sigificant problems. Especially when the previous management has a record of financial mismanagement and extreme risk-taking. The new management, of course, is an entirely different matter. But the new management has inherited a problem which, in my opinion -- and that of some significant members of the tyres industry -- simply cannot be solved in a realistic timescale. And time is running out for Amtel-Vredestein.

Amtel has said it is discussing with Sibur Russian Tyres with the aim of enacting either a take-over or a reverse take-over. Personally I do not see this. There is no significant synergy between Amtel-Vredestein and Sibur Russian Tyres. SRT is in truck tyres and wants to remain in truck, and build its business by dominating the Russian truck sector with products designed for Russian roads and Russian hauliers. Amtel has vigorously pursued the passenger car tyre market, building new factories and acquiring a retail chain and then aiming to act as a low-cost manufacturer of high quality tyres for the domestic and export markets.

I can see nothing to be gained from a merger, however it is structured. In my opinion the Sibur discussion is more of a delaying tactic than a real strategic option. So I shall ignore SIbur as a factor in this equation for the time being.

I also want to distinguish between Amtel and Vredestein. Vredestein is an attractive company. It is well-run, profitable and has many growth options available to it. It has a strong brand and good products which can be sold into niches. The management is experienced and knows the tyre industry in both West Europe and elsewhere. More to the point, the Vredestein business has been insulated from the Amtel disaster. The management at Vredestein has fought to maintain its financial independence from the Amtel monster and they have succeded.

Vredestein is one of the jewels in the Amtel-Vredestein crown. I can think of a couple of Asian tyre makers who would readily pay a significant premium to buy the Vredestein operations for their brand position; their profit potential and the accumulated experience of the management. I can also think of a couple of private equity funds who would quickly find the capital to buy the company purely as an investment vehicle.

None of the Russians currently serving on Amtel's main board, on the other hand, has much idea about the tyre business. That knowledge is supplied by the Vredestein team. Amtel grew too fast, was completely undisciplined in its approach to finance and is now paying for that lack of discipline. Its overly aggressive and ambitious management has gone, replaced by some financial wizards who have the task of salvaging whatever they can from the mess.

Some things are worth salvaging, and will help offset at least some of the debts. I already mentioned the Vredestein operations in Enschede. But Amtel's management was determined to have some new passenger car tyre factories. Most significant of these is the second factory on the Voronezh site -- Voronezh II. Amtel wisely left most of the engineering and specification for this plant to the Vredestein team. Despite some interference from the Amtel management, the Vredestein team has created a greenfield factory in a fast-growing and lucrative market, built with modern, highly flexible tyre manufacturing systems in an extreme low cost region and with good supplies of raw materials.

Tyre makers dream about that kind of project. Just as Pirelli paid a premium to acquire control of a newly-built tyre factory in Shandong Province, China, other tyre makers will fight each other for the chance to enter the Russian market with a modern, well-equipped and well-engineered tyre factory. Even more so in today's climate where there is a shortage of that type of capacity.

Voronezh II will initially produce approximately 2.5 million passenger car and light truck tyres per year, which could be expanded up to 4.1 million tyres per year with additional investment. The company has booked costs of around $79 million for the Voronezh II project. I would be surprised if it were worth less than $100 million to an ambitious tyre maker.

Earlier -- in 2005 -- Amtel opened a new line at its Kirov factory. While the Kirov line is not so interesting as the Voronezh II plant, it is still a worthwhile asset.

There can be little doubt that, if Amtel's proposed merger with Sibur falls through, then the break-up of Amtel becomes more likely. If Amtel is broken up, then both Vredestein and Voronezh would attract a great deal of interest, but the price will still be nowhere near enough to settle Amtel's huge debts.

I hope I am wrong; I hope Amtel-Vredestein survives. But my instincts tell me that Amtel had its chance to re-build Russia's tyre industry and, unfortunately, the people making the decisions were not up to the task.

If you have a comment on this piece, please email David Shaw