NTN and SNR Second Round Negotiation Involving Bearing Businesses

NTN Corp. (Japan; TSE: 6472) and SNR Roulements (France, a subsidiary of automaker Renault S.A., France, itself 15.7% state-owned) have reopened negotiations involving their respective bearing businesses. The two companies had been involved in serious negotiations, reportedly focused on a possible buyout of SNR by NTN. The first round of talks stalled and broke off in September 2005. While both were taking a public step back from formal negotiations, they told representatives from both companies continued work on the problematic issues. Rumors gained momentum again in January 2006, when NTN reportedly reached the point of beginning serious due diligence and studying long-term financial and operating possibilities for SNR's assets. At the time, Renault issued a statement denying negotiations were ongoing, that there were no NTN employees in Annecy, and that SNR continued to explore strategic alternatives. Negotiations have once again reached the stage where they are being formally acknowledged, and Renault felt it necessary to produce a prepared statement to that effect. Renault's statement was notably short: Renault and NTN have decided to resume their talks regarding a partnership in the bearings business. Talks will be aiming at exploring the possibility for NTN, one of the leading global manufacturers of bearings, to use SNR Roulement, Renault¡¯s subsidiary, as their center for future developments, mainly in Europe. They will address especially the issues of the optimum use of SNR manufacturing capacities, the choice of Annecy as the major NTN Center for bearing research and development in Europe, and the role of Renault in this partnership. In a very competitive market, requiring increasing R&D efforts, the contemplated partnership would therefore allow the consolidation of existing employment and confirm SNR as a technical innovator and important player. More complete and full details are in eBearing's January article, linked above. Ironically, Renault has just given The Timken Company a coveted Supplier Quality Award for bearings supplied to the automaker; only three of over 600 global suppliers received this award. Timken has been a Renault supplier only since 2003, when Timken acquired Torrington. Timken supplies Renault with roller finger followers for engine valvetrains, along with some gearbox and wheel-end bearings. Many observers believe the negotiations between SNR and NTN are being forced on SNR by Renault, as it continues to pursue its restructuring initiatives. The effort parallels Renault's relationship with Japanese automaker Nissan, which has been getting ever-closer since the two began joining forces in 1999. Renault currently owns just over 44% of Nissan. Carlos Ghosn is now President and CEO of Renault as well as Nissan, where he is credited with engineering and implementing one of the most celebrated turnaround stories in recent automotive history. Last month, Mr. Ghosn revealed Renault's "Commitment 2009" which is dedicated, "To make and sustain Renault as the most profitable European volume car company" by 2009 and sell 4 million vehicles. SNR's future is in question, not only because it is an "other" operating division of Renault, widely considered nonstrategic, but also because SNR's dependence on Renault makes it a difficult business to market amid the parent's restructuring. Although SNR manufactures bearings for the industrial and aerospace markets, most consider its key characteristic is as an auto industry supplier. SNR dependence on sales to parent Renault runs deep. As the automaker's primary source for bearings, SNR supplies more than 90% of Renault's bearings worldwide. While SNR also supplies bearings to several other automakers, as Renault division it is not likely to gain significant outside traction. However, SNR's position in that supplier relationship with Renault is unlikely to remain intact, given the increasingly competitive world marketplace for vehicles and components, and Renault's competitiveness directive. In 2004, Renault launched the first of many planned vehicles based on a shared Nissan platform, where SNR bearings have only a minor role. As product plans develop, NTN's importance as a Nissan/Renault vendor is likely to grow, as SNR's declines. NTN already has a direct vendor relationship with Renault, producing CV joints for the company via a joint venture dating back to 1988. SNR has begun some early and obvious restructuring efforts. For example, in October 2005, SNR divested its bearing ball manufacturing resources in Annecy, France to NN Inc. (USA). Adding to the incentive for a relationship, NTN and SNR are reportedly finding only minimal overlap in terms of market position, manufacturing and sales resources worldwide, and product lines. Renault management has said no decisions regarding the NTN relationship are imminent, and any decision will wait until after the publication of a feasibility study. The study is due to be completed in May or June.