UPDATE: Michelin Launches EUR1.2 Billion Capital Hike To Fund Growth

Tire maker Michelin (ML.FR) Tuesday launched a heavily discounted EUR1.2 billion capital increase to finance its expansion, particularly in fast-growing emerging markets.

The move took investors by surprise. At 0750 GMT, Michelin's shares traded down EUR5.26, or 8.1%, at EUR60, making it the biggest faller in the benchmark CAC-40 index, which traded down 1.2%.

The subscription price of the new shares was set at EUR45, a 27% discount to the closing price Monday. Shareholders are entitled to two new shares for every 11 shares currently held. The subscription period runs from Sept. 30 to Oct. 13 and the new shares will begin trading Oct. 25.

Michelin wants the cash to fund its ambitious medium-term growth plans that include boosting sales by 25% between now and 2015 and by 50% by 2020.

The company has been spending about EUR1.2 billion a year on capital expenditure annually in recent years, but this will rise to EUR1.6 billion from 2011, joint managing partner Jean-Dominique Senard told reporters.

It intends to add 150,000 tons of production capacity annually in its target markets of Brazil, China and India, equivalent to more than one new factory every year. The tire maker is following in the tracks of the world's major automakers, which are driving full-speed into emerging markets in search of faster growth.

Investment will increase between 5% and 6% annually through 2015, said Michel Rollier, Senard's co-chief. Of the EUR1.6 billion in annual investment, EUR1 billion will be devoted to emerging markets.

Rollier said he doesn't exclude taking advantage of acquisition opportunities, but Senard said there was no "hidden project" for a purchase behind the rights issue.

Rollier said the capital hike wasn't designed to shore up Michelin's finances, as the company "has the best balance sheet it has had in 30 years."

Senard said Michelin expects to increase its global tire sales by 50% through 2020, with sales in emerging countries likely to double while those in mature markets will rise by 25%. The fast ramp-up outside Europe and North America will mean that 45% of the company's sales will be in emerging countries by 2020, compared to 33% at present, he said, and nearly half of total sales will be of energy-efficient tires with low rolling resistance, compared to only 10% now.

Rollier said the company intends to maintain a pricing policy whereby any increases in raw materials prices are passed on to customers. The company, which vies with Japanese competitor Bridgestone Corp. (5108.TO) to be the world's leading tire maker, enjoys strong pricing power thanks to its large market shares.

Michelin reaffirmed its earnings guidance for 2010, saying it still expects to achieve an operating margin of around 9% of sales on a increase of more than 10% in volume sales, together with a positive cash flow. It said the planned capital boost will have no impact on its 2010 cash flow.

Other medium-term goals include achieving an operation profit excluding exceptional items of substantially more than EUR2 billion, a long-term return on capital employed of more than 9%, to generate significantly positive cash flow through 2015, and a dividend payout ratio of around 30% over that period.

-By David Pearson, Dow Jones Newswires; [phone]; [e-mail]