Apollo buys Cooper Tire for $2.5 bn seeking US access
5 min read 12 Jun 2013, 09:16 PM ISTApollo Tyres intends to de-list Cooper Tire after the acquisition is completed by the second half of the fiscal year ending March 2014
Premium(Apollo will pay $35 per share, representing a premium of about 43% to Cooper’s Tuesday close. )
New Delhi: Apollo Tyres Ltd, India’s second largest tyre maker by market value, has agreed to buy Cooper Tire and Rubber Co. for $2.5 billion (around ₹ 14,575 crore) to gain access to the US, the world’s second biggest auto market.
The Gurgaon-based company will pay $35 a share to stockholders of New York-listed Cooper Tire, a 43% premium on its closing price on Tuesday.
Shares of Cooper Tire rose 40% at $34.50 in pre-market trading.
Apollo Tyres, which rose 3% to ₹ 92 on BSE, intends to de-list Cooper Tire after the acquisition is completed by the second half of the fiscal year ending March 2014. The announcement was made after trading closed in Mumbai.
The transaction is one of the largest deals in India’s automotive industry, bigger than Tata Motors Ltd’s purchase of UK-based Jaguar Land Rover from Ford Motor Co. for $2.3 billion in 2008. More recently, in April, private equity firm KKR and Co. acquired a 90% stake in Mumbai-based Alliance Tire Group for around $500 million.
JK Tyre and Industries Ltd, owned by the Singhania family, bought Mexican tyre company Tornel for ₹ 270 crore in 2008.
Apollo Tyres, which last month agreed to sell most of its South African operations to Sumitomo Rubber Industries Ltd for $60 million, is looking to expand beyond India and Europe to meet its goal to become one of the top 10 tyre makers in the world by 2016. The deal would be the biggest takeover of an auto-parts maker since 2007, according to data compiled by Bloomberg. The deal needs regulatory and shareholder approval.
After the acquisition of Cooper Tire, to be carried out through Apollo Mauritius Holdings Pvt. Ltd, Apollo Tyre will become the seventh largest tyre company in the world. Its turnover will rise almost three times to $6.6 billion from $2.4 billion in the year ended March. The company will also gain access to markets in China, Africa and Latin America, besides brands that include Cooper, Avon, Roadmaster, Mickey Thompson, Starfire, Mastercraft and Chengsan.
The deal will be a game-changer for Apollo Tyres, chairman Onkar S. Kanwar said.
“It’s an all-cash deal with 100% equity in the company. Had we not done this, we would have been growing very slowly," he said in a media briefing. “We expect the US economy to recover faster and grow at a better pace than rest of the developed countries. We will also get into China, which is one of the largest and most exciting markets."
Apollo Tyres and Findlay, Ohio-based Cooper Tire will borrow money from Morgan Stanley, Deustche Bank, Goldman Sachs and Standard Chartered, Apollo Tyres chief financial officer Sunam Sarkar said at the briefing.
The two companies will jointly raise $2.5 billion from the sale of bonds with maturity of up to eight years, he said. Apollo Tyres’ exposure to new debt will be about $450 million, Sarkar said. The companies will also raise some funds through asset-backed loans, he added.
Apollo Tyres earns two-thirds of its revenue from India, where weak economic growth has hurt demand for cars and commercial vehicles. The acquisition of Cooper Tire will give Apollo access to the US market for car and truck tyres. It will also gain access to the Chinese market, the world’s largest for trucks and buses.
Analysts were divided on the benefits of the acquisition.
Shareholders may react negatively in the near term, according to Surjit Arora, sector analyst at brokerage firm Prabhudas Lilladher Pvt. Ltd. “It’s a very big acquisition and they are paying a big premium," he said. “Being in the tyre segment, the deal is a bit stretched out."
“I don’t think investors will react badly to stock as they are buying a profitable company that has a cash reserve of $271 million," said Mahantesh Sabarad, senior vice-president at Fortune Equity Brokers (India) Ltd.
“The only negative, however, is that by acquiring Cooper, they will have an additional debt of $2.5 billion. But at the same time, they are getting additional value. For Apollo, cost of debt is far cheaper than cost of equity. I am relieved about the fact that transaction is done via debt and that will not have an impact on Apollo shareholders," he added.
Apollo Tyres’ balance sheet will be stretched out for the next three-four years, another analyst at a Mumbai-based brokerage firm said. “The valuation looks reasonable. Apollo has always been ambitious in global markets and this move is in that direction," he said on condition of anonymity. “But due to the debt size, the stock will be under stress for three-four years, but if you look at it from 5-10 years perspective, it augurs well from the company."
The deal is likely to create some ₹ 465-700 crore of value a year at the operating margin level for Apollo Tyres, it said in a statement. “These ongoing benefits are expected to be fully achieved after three years and derived from operating scale, sourcing benefits, technology, product optimization, and manufacturing improvements. The transaction is expected to be immediately accretive to Apollo’s earnings," it said.
There may be no changes in the current management at Cooper Tire and it will continue to operate out of its facilities located around the world, according to Neeraj Kanwar, vice-chairman of Apollo Tyres.
“Cooper will continue to recognize the labour unions and honour the terms of collective bargaining agreements presently in effect while generally maintaining compensation and benefit levels for non-union employees," Neeraj Kanwar said.
Cooper has eight factories in countries such as China, Serbia, the US, Mexico and the UK. Apollo has six facilities.
“They have a good balance of low-cost sourcing and niche products, which will be a big plus for us," Kanwar said. “In India, on a stand-alone basis, we want to be a leader in the segments that we are working in. This acquisition will be an impetus in that direction. Indian customers will get best of both the worlds in terms of brands, values and technology."
Apollo Tyres leads the market in India with a share of 32% in truck and bus radials, 18% in passenger vehicle segment, 24% in light commercial vehicles segment and around 20% in agricultural products.
After the acquisition, the company’s capacity will rise from 1,500 tonnes a day to 3,500 tonnes and staff strength will rise from 16,000 to 30,000 employees.
Bloomberg contributed to this story.
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