Bridgestone Buys Bandag

So I understand that last week, Motley Fool Hidden Gems Watch List stock Bandag (NYSE: BDG  ) got itself bought out by globe-striding Japanese tire maker Bridgestone. The acquisition, valued at $1.05 billion, constituted a 12% premium to Bandag's market cap.

But that's not what makes it a good deal for Fools. The good times actually come in two parts:

• First, it nets those of us who bought into the stock when it was first mentioned, a tidy 23% profit -- matching, if not beating, the performance of the S&P 500.
  
  
• Second, it gets us out of a weakening company, whose free cash flow was rapidly drying up.

Count your blessings
Sure, we'd all rather have seen the tire-retreader outperform the S&P. But given the choice between a par-for-the-course 23% gain, and the underperforming, flat-for-19-months stock price that Bandag had turned in before the buyout, I think we can all agree that the former choice was preferable.

More importantly, though, it had become increasingly clear (over the quarters since Bandag caught our attention), that the company just plain wasn't up to snuff. Back when Tom first highlighted the stock, it boasted $35.1 million in trailing-12-month free cash flow, putting its enterprise value-to-free cash flow ratio (EV/FCF) just less than 20. Since then, performance has rolled downhill like a wayward tire. The most recent figures, for example, show Bandag generating $61.5 million in operating cash flow, and spending $84.3 million on capital expenditures (yes, that's negative free cash flow) over the last 12 months. Hard to calculate an EV/FCF for numbers that ugly.

Consistent with a cash-burning company, the balance sheet also deteriorated. From May 2005 through last report, Bandag had reduced its tiny debt load by $4 million, while making much more progress in reducing its $200-million-plus cash hoard to just $92 million.

Granted, this not the worst company in the tire space. Rival Goodyear (NYSE: GT  ) , for example, at three times Bandag's market cap, managed to burn 17 times as much cash as Bandag did over the past four quarters. Still, Bandag's performance was pretty much a bust, and this Fool, for one, will shed no tears at its passing -- save, perhaps for Bridgestone's poor shareholders, who are now stuck with it.

Inflate your tire knowledge:

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Fool contributor Rich Smith does not own shares of any company named above.