ChemChina wants to buy Pirelli for $7.7 billion

Willie Grace | 3/24/2015, 2:27 p.m.
But the bid may turn into a in a protracted takeover battle after ChemChina bid 15 euros a share for ...
Pirelli provides tires to the Super Trofeo Blancpain series, among others.

Bid may turn into a in a protracted takeover battle

MILAN -- China National Chemical Corp. (ChemChina) will buy into Pirelli, the world's fifth-largest tire maker, in a 7.1 billion euro ($7.7 billion) deal that that would place one of the symbols of Italy's manufacturing industry in Chinese hands.

But the bid may turn into a in a protracted takeover battle after ChemChina bid 15 euros a share for Pirelli, just 4 percent higher than Pirelli's price on the last day before talks became public last week.

Shares in Pirelli rose as much as 3.5 percent on Monday to 15.76 euros - above the offer price, with some traders pointing to expectations that ChemChina may have to lift its bid to win over shareholders.

If successful the deal will give ChemChina access to technology to make premium tires, which can be sold at higher margins, and give the Italian firm a boost in the huge Chinese market.

The Chinese company and its partner Cam Finanziaria -- Pirelli's largest investor, which is partially owned by Chairman Marco Tronchetti Provera -- have a high threshold to end the Milan-based company's public listing as planned, needing to secure 90 percent of Pirelli's stock for the move.

The tender is expected to start this summer, according to the agreement.

"Minority shareholders have a lot of power in their hands," said Vincenzo Longo, a strategist at IG Markets in Milan. "The price offered isn't giving them the expected premium."

Banca Akros said in a note: "The success of the likely public offer at 15 euros cannot be taken for granted."

Asia rivalry

The deal would give Pirelli, whose tires equip cars in Formula One motor racing, would have more bandwidth to compete against larger rivals such as Michelin and Continental which are looking for growth in Asia.

The deal was agreed with Pirelli shareholders on Sunday. ChemChina agreed to pay 15 euros a share for the 26.2 percent of Pirelli owned by Cam Finanziaria, or Camfin, the companies said in a statement. ChemChina will then make a public tender offer for the rest of the tiremaker at the same price. The bid price values Pirelli at about 7.1 billion euros.

The agreement calls for China National Chemical Corp, as ChemChina is formally known, to hold at least 50.1 percent of Pirelli and Camfin as much as 49.9 percent. The deal would be the biggest Italian purchase by a Chinese company.

If the partners fail to reach the 90 percent needed to take Pirelli off the market, there is a more complicated alternative. With a stake of at least 66 percent, ChemChina could merge its holdings with Camfin and force a delisting, according to analysts.

Even with the clout that smaller shareholders have, the ChemChina deal is likely to be the only game in town. Prospects of a counteroffer for Pirelli look "limited" because of the "strong" agreement between Camfin and ChemChina, IG Markets' Longo said.

Provera, 67, who is a part-owner of Pirelli, would remain chief executive officer under the deal, while ChemChina will appoint a new chairman.