Goodyear Tire & Rubber Co. (GT) plans to make a public offering of $435 million of mandatory convertible preferred stock for the first time in history. The offering consists of 8.7 million shares at an average price of $50. The estimated proceeds of $421 million will be used to redeem $350 million of outstanding 10.5% senior notes due May 15, 2016 and for general corporate purposes.
Goodyear has given its underwriters a 30-day option to buy up to an additional 1.3 million shares. The underwriters are Goldman Sachs Group Inc. (GS), JP Morgan Securities, a unit of JP Morgan Chase & Co. (JPM), Citigroup Inc. (C) and Credit Agricole Securities CB. However, if the underwriters exercise options to purchase additional shares, then net proceeds could be as high as $484 million.
Preferred stock typically pays a specified dividend, has no voting rights and provides preference over common stock if corporate assets are liquidated in a bankruptcy. However, the company has not stated anything clearly in its SEC filings about the dividend payments and policies. In fact, Goodyear stopped paying dividends since its financial crisis in 2003 with a view to conserve cash. However, as the preferred shares of Goodyear mature, they will be automatically converted into regular shares by April 01, 2014.
According to Standard & Poor’s Ratings Services, this public offering will not influence Goodyear’s corporate credit rating, which is graded at BB- currently with a stable outlook.
During 2010, the company’s results were disappointing with a 19.5% drop in profit to $41.2 million or 65 cents and a 10% dip in operating income to $54.6 million, mainly driven by higher raw material costs. However, sales grew 19% to $919.6 million as a result of enhanced productivity and higher volumes.
Goodyear is still recovering and has a long way to go to ensure consistent profitability. In this regard, management has outlined major plans to improve balance sheet, upgrade factories and develop products. However, increase in prices of tires may again affect sales in the near term.
The shares of Goodyear Tire & Rubber Co. currently have a Zacks #3 Rank that translates into a short-term ‘Hold” rating. For the long-term, they have a “Neutral” recommendation.
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