<THE BORING PORTFOLIO>
Part 3 + Comments
ALEXANDRIA, VA (August 11, 1999) -- The following is part two of the review of the Carlisle Companies (NYSE: CSL) - Titan International (NYSE: TWI) conference call held last week following the announcement of the signing of a letter of intent to merge the two companies.
On Monday, I said I would comment today, but this is running a little longer than I expected and I have to limit the length of each of these entries. I will say as a preview that there's not that much commentary for me to share. I might get into a discussion of merger & acquisition accounting treatments, but I've written about that somewhat exhaustively here and elsewhere. Carlisle's use of the poolings-of-interests treatment is not the best course of action, in my opinion, and I think the market is more than able to look through goodwill amortization in assessing a company's economic progress. I am somewhat surprised that the company's officers would worry about it, but I guess when you're dealing with analysts who judge economic progress on the basis of accretion/dilution in EPS rather than looking at economic value added, you have to speak in certain terms.
The one disappointment that I have, financially speaking, is that the poolings election delays a share repurchase. But these are minor concerns, and I am not concerned about how this management team looks at ecomic value added. If you want "the Street" to understand the deal, it's better to speak in its terms rather than in another language. I'm quite sure the company walks the walk financially.
Operationally, the Carlisle people have their heads screwed on straight. Put that together with what looks like a bunch of very creative products people at Titan and mix that in with a deal done at an insignificant premium of enterprise value to invested capital, and I think this has the chance of becoming another solid value creation event at Carlisle over the long term.
When you talk about value investing, these guys are doing the heavy lifting for me. I made one good decision to acquire these shares three years ago (former Boring Portfolio manager Greg Markus and I bought shares on the same day in 1996), and I haven't had to think about it again. At this level, a small addition to the investment may also be in order. I might announce that sometime within the next week. I'll finish this call on Friday.
"When you look at the deal in total, you take an extremely strong large wheel and tire off-road franchise that Titan enjoys and combine it with Carlisle's strong small lawn, garden, and specialty tires and wheels, and the area in the middle where we overlap -- and you put these two together. Our goal is (subject to due diligence) to marry these two entities in our low-cost operating environment to product what we believe will be the leading tire and wheel provider in the world."
In order to make the acquisition accretive to EPS, "We need to find a contribution from Titan in the year 2000 of $40 million pre-tax, $25 million after-tax, to make this accretive. That will be the overwhelming focus of our activities over the next couple months.... Titan has done that in the past, I've alluded to the troubles that are well known, and certainly the continuation of the soft [ag] market in the coming months won't make it any easier. We've already identified some [areas for improvement], which we can't go into detail at this point.... We know what the task is and we've got to put the blueprint together, and we'll be working on that in-depth over the next couple months."
"I would just add to Dennis's comments that one of the differences here is that, with this combination, we're adding in a global tire manufacturing situation, and a lot of the problems at Titan relate back to an inability to produce enough product. We're adding in three tire plants located around the world.... We think that's really the beginning of a pretty dramatic change in their short-term outlook."
In terms of management teams, "We're just beginning our due diligence process and we want to keep all of our options open, but there's a lot of overlap here and we think there's a lot of opportunity for savings, but it's too early to speculate about any specifics about the consolidation."
Relating to a share repurchase, "Historically what we've done... when we've used shares, we've gone back and repurchased shares after the transaction. This is a pooling transaction, so obviously we can't have a stated objective to do that immediately, but our game plan is to think of shareholder returns, and that's something we'll do in the long term.
"We believe that the proven portion of [Titan] was adequately attractive to bring us into this transaction. The low sidewall technology is fascinating. We have done some research on it. Certainly Titan management believes very sincerely in the appeal this product has for the future, and we're attracted by that, but we think with or without the low sidewall technology that this is still a good match. It doesn't rest only upon LSW by any means."
Rick McKinnish: "As it relates to the existing appeal of the companies together, Carlisle Tire and Wheel has a very dominant situation in the golf business, lawn & garden, trailer, and all-terrain vehicle [markets]. Titan's strength is in agriculture and heavy duty/industrial, which is earthmover skidsteer. There's only about 25% overlap here. 75% of Titan is new capability to Carlisle. You've been reading a lot lately in the aftermarket about the consolidation of distribution. We believe strongly that clear leaders benefit greatly -- the companies with the broadest product line with market leadership -- from consolidation of distribution, and we think this merger is really quite exciting as relates to aftermarket distribution.
"The capacity at Titan over the last year and a half has been impacted dramatically by the two strikes, but the Brownsville facility...[is] full of equipment and it's being rebuilt. For those of us in the tire business, these are the kinds of things that are very difficult to do in six months. We think Titan's stated public timetable quite frankly was unachievable. We view it long term as a low-cost tire facility. The Carlisle plants -- we have a plant in China that produces 25,000 tires a day, seven days a week. It's a low cost producer of this product and it's expanding as we speak, and we'll be able to offer an additional 4,000 to 5,000 tires a day into this new relationship. We have a low-cost plant in Trinidad -- it's the same scenario. It's got capacity coming onstream. My point here is that there are a lot more tools in the equation now that will enable us to move a lot faster to improve our numbers."
The capabilities of the plants in China and Trinidad stop at about a 16-inch tire. "But what you do here... you move certain products from the Titan plants into these plants, which frees up capacity on the larger tires at the existing Titan plants."
The company expects to complete the deal by the mid- to late-fourth quarter, with the month of November being the target date. "There's a lot of due diligence to be done."
"We have a history at Carlisle of having very positive, very constructive, very compatible relationships with union and non-union members of our hourly workforce, good salary relationships, and that will be an umbrella and a pattern that we will continue to work with."
"Maury Taylor [and Steve Munn, Carlisle Vice-Chairman and COO] have agreed that [Taylor] will be the non-executive Chairman of the Carlisle Tire & Wheel group and will be a director of Carlisle, but Maury Taylor will not be in the operational side of the business."
"We have historically said we would push the debt-to-capital ratio for strategic reasons to the 50% to 55% range, but that would be a short-term thing. We've also talked about having our optimal debt-to-capital ratio in the 30% to 35% range." This transaction would keep that ratio below that upper limit.
"Titan has invested heavily in their business over the last three or four years, both through acquisition as well as through the addition of capital equipment and heavy investment in developing the LSW technology. We believe that heavy ratio of [spending] to sales, which has been much above Carlisle's ratio, is mostly behind Titan. Certainly there will be some things needed to [streamline -- original unclear] operations, but Titan is very asset intensive at this point for the level of sales, and one of our goals will be to make the assets much more productive. If that means implementing new productivity systems, we'll be looking at that. I think in general we can say that the capital intensity going forward should be less than what it has been in the past."
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</THE BORING PORTFOLIO>
Stock Change Bid
APCC + 11/16 20.06
BRKb +88 2124.00
CSL - 1/8 40.31
GTW +5 1/4 83.25
Day Month Year History
BORING +2.78% -1.04% 3.19% 38.56%
S&P: +1.60% -2.02% 6.49% 117.30%
NASDAQ: +3.01% -2.79% 16.98% 146.41%
Rec'd # Security In At Now Change
8/13/96 200 Carlisle C 26.32 40.31 53.13%
4/20/99 460 American P 14.48 20.06 38.59%
2/9/99 100 Gateway 20 72.38 83.25 15.03%
12/31/98 12 Berkshire 2276.17 2124.00 -6.69%
Rec'd # Security In At Value Change
8/13/96 200 Carlisle C 5264.99 8062.50 $2797.51
4/20/99 460 American P 6659.25 9228.75 $2569.50
2/9/99 100 Gateway 20 7237.50 8325.00 $1087.50
12/31/98 12 Berkshire 27314.00 25488.00 -$1826.00
</THE BORING PORTFOLIO>