15 September 1997

Nomura Takes Minority Stake in Tofan Grup (Central Europe Automotive Report)

Nomura International plc snapped up a 49% stake in Tofan Grup for $60 million and will arrange debt facilities worth $40 million. The Tofan Grup owns tire manufacturing and distributing companies in Romania. Nomura's investment, made in July, is the second largest foreign investment ever made in the Romanian
automotive industry.

"The tire industry may not be a very exciting industry, but it is nevertheless interesting," said a Nomura official. "You have 23 million people [in this] market, and then you have the markets in the neighboring countries. We did believe --
and still do -- it was a sound business opportunity."

[for more on the aggressively expanding Tofan Grup, see this month's Company Spotlight on page 10]

Company: Tofan Grup
Location: Bucharest, Romania
Contact: Gelu Tofan, Owner
Business: Tire Manufacturing and Distributing

“Putting Romania on the Right Track”

This ambitious mission statement belongs to an equally ambitious man, Gelu Tofan, owner of Tofan Grup, a tire manufacturing and distributing company. His is a classic success story, which began in 1991 when the 30-yearold Mr. Tofan was one of the 4,500 employees of the Romanian tire manufacturer, Danubiana. He bought a second-hand truck and started a tire distribution business —Tofan Trans.
The small business grew quickly and three years later he opened Romania’s first modern tire re-treading facility — Tofan Recap. Today, Tofan Recap recycles lorry and truck tires, both on customers’ demand and through its own network of dealers who have solid relationships with transport companies.

Cash Cows Fund Expansion.
In 1993, Tofan Grup was established. The company focused on tire trading and production and established a countrywide distribution network. Both businesses — Tofan Trans and Tofan Recap — turned into profitable cash machines and soon Mr.Tofan started looking for other investment opportunities. Such an opportunity came in the form of Danubiana, Tofan’s former employer, which he took over in December 1995 by buying 51% of its stock from the State Ownership Fund (“SOF”). The Bucharest-based Danubiana is the largest of six Romanian tire producers. The company manufactures tires, tubes, flaps, and stripes for wheels and has an annual capacity of 2 million tires. Actual production in 1996 was about 1 million units.

Danubiana is the leader in several market segments, including tires and tubes for
agricultural vehicles and machinery (60% market share), tires for lorries and buses (50% market share), and tires for trucks and off-road vehicles, supplying both OEMs and the spare parts market.

“Danubiana has been a worthy acquisition due to its significant export potential. Exports — mainly of tires for agricultural machinery — to very demanding markets such as the US, Germany, UK, France, Sweden, and Italy, have increased from $3 million in 1991 to over $20 million in 1996,” said Tofan. Under Tofan Grup’s leadership, Danubiana’s turnover increased from $73 million in 1995 to $80 million in 1996, while gross profit doubled over the same period. According to the company’s business plan, output should grow by 50%, with exports accounting for the bulk of this increase.

“The tire industry [has] high entry barriers and fierce competition,” says Tofan. “If you don’t make at least $300-$350 million turnover per year, you’re [in serious trouble].” Consequently, in April 1997 Tofan Grup cut a new deal with the SOF, taking over two other Romanian tire manufacturers, Victoria and
Silvania.

Victoria Soars.
Victoria concentrates on the passenger car tire segment where it holds an
overwhelming 80% market share. Its recently launched Montana brand will be used by Romanian OEM customers, including by Daewoo for its Cielo/Nexia and Espero models. The Montana brand will also be targeted at the important budget brand tire market. The Tofan Grup paid some Lei 135 billion ($30 million) for 51% of Victoria’s stock, but Mr. Tofan isn’t complaining about the price. The company achieved a turnover of Lei 159 billion in 1995, Lei 259 billion last year, and forecasts 1997 turnover at Lei 557 billion. As for Victoria’s profits, they are going through the roof, totaling Lei 2.6 billion in 1995, Lei 3.7 billion in 1996, and Lei 45 billion this year. Victoria has successfully taken advantage of the Tofan Grup’s extensive dealer network.

Silvania Struggles.
Prospects are not as bright for Silvania, a manufacturer of radial tires for lorries and heavy trucks. Although it is Romania’s newest tire producer (starting operations in 1981), the company has 1,400 employees, is highly indebted, and has been bleeding red ink for some years now. The SOF conditioned Victoria’s takeover with the purchase of the money-losing Silvania. “It’s going to be tough — we launched a heavy investment program in those three companies — but we’ll work it out, don’t worry,” said Tofan.

Today, Tofan Grup employs 12,000 workers and is the 26th largest tire manufacturer in the world. The company exported goods worth $50 million in 1996, and expects exports to total $75 million this year and $100 million in 1998. The key for this expansion will be focusing on sales of its niche products — farm
machinery tires and budget brands — to the US, EU, and Middle East.

Fresh Foreign Capital.
Yet the big news for the Tofan Grup came on July 1 of this year — Nomura International plc bought a 49% stake in Tofan Grup for $60 million and will arrange debt facilities worth $40 million. “Five years down the road I’m positively sure we’ll be [among] the top 20 tire producers in the world,” said Tofan.

Catalin Dimofte (Bucharest)

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