Tread carefully

Pirelli girl: Joan Smalls

Since 1964 the Italian company Pirelli has been famous for more than its tyres. In a marketing coup a lot more risqué than its rival Michelin (which began publishing restaurant guides in 1900), Pirelli pays beautiful women to pose topless for its annual calendar. This year’s edition features top models like Joan Smalls (in thigh-high boots and not much else) and Natalia Vodianova (photographed in a bubble bath).

The Chinese can be a bit more prudish, so the future of the calendar – sent to Pirelli clients and VIPs – may be in question if a takeover agreement with China National Chemical Corp (ChemChina) goes ahead.

The €7.1 billion ($7.8 billion) deal (excluding €1 billion in debt) marks the largest investment by a Chinese firm in Italy to date, but it is by no means the only one. The country is one of China’s most favoured European investment destinations (see WiC262), and its attraction is only set to grow if the euro continues to weaken.

The deal will see ChemChina’s tyre making unit, China National Tyre and Rubber (CNTR) pay €1.8 billion to get a 26.2% stake in Pirelli currently owned by investment vehicle Camfin. Russian oil company Rosneft owns 50% of Camfin, with the remainder controlled by Pirelli chairman and CEO Marco Tronchetti Provera, plus Italian banks Intesa Sanpaolo and UniCredit.

Camfin shareholders will invest the sale proceeds into a new holding vehicle jointly controlled by CNTR, which will then make a mandatory offer for the remaining Pirelli shares. Both portions of the deal are being struck at €15 per share, a notch below the stock’s pre-deal price of €15.23.

Since January 6, Pirelli’s share price has risen 44.7% and at €15 per share, the deal is valued at 17.9 times 2015 earnings, above competitors such as Michelin on 12 times.

Should all the shares be tendered, CNTR will end up owning 65%. Pirelli will then be delisted from the Milan Stock Exchange 93 years after it made its debut there (the company was founded by Milanese businessman Giovanni Battista Pirelli in 1872 just two years after the country’s unification). However, Tronchetti Provera has not ruled out a relisting, potentially of the group’s higher margin premium tyre business.

In an interview with Italy’s Corriere della Sera, he hits back at critics angry that the country stands to ‘lose’ one of its prized industrial assets.

“Some of the outdated knee jerk reactions worry me,” he told the newspaper. “Our response cannot be a nationalistic approach dressed up as industrial policy.”

Tronchetti Provera is adamant that Pirelli’s head and heart will remain in Italy and argues that this has been secured by a clause requiring 90% shareholder approval before Pirelli’s domicile can be changed.

He adds that he has been in discussions with ChemChina CEO Ren Jianxin for three years, but only finally chose the group after flirting with South Korea’s Hankook Tyre and Japan’s Yokohama Rubber.

China’s Global Entrepreneur points out how successful ChemChina has been at making its previous acquisitions work, typically spending much time and effort on cultural integration once its deals have been completed. In this case, Tronchetti Provera will remain on board as CEO at Pirelli, with CNTR picking a new chairman.

The combination of Pirelli, the world’s fifth biggest tyre maker and CNTR, one of China’s three largest, will create a world leader. Pirelli already derives roughly 80% of its industrial tyre sales (i.e. for trucks) from emerging markets, particularly South America. It has also invested heavily in China where it has a factory in Yanzhou.

Together the two hope to expand their emerging market footprint. Pirelli can also help CNTR move up the value chain into high performance tyres, an area in which the Italian firm has long been a pioneer.

For ChemChina’s Ren, the deal is likely to further cement his reputation as the M&A king of China’s chemical sector. Having started out producing cleaning liquids for tea urns in Gansu province, it will be interesting to see how Ren adapts to la dolce vita should he gain fuller control of the iconic Italian brand.

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