By the end of the last month, Apollo Tyres Ltd’s share price fell nearly 40 % from the levels it was trading on June 12, 2013. The company’s decision to acquire US-based Cooper Tire & Rubber Company, which meant it had to raise fresh debt to fund its Rs 14,500 cr ($ 2.5 bn) acquisition, was met with caution by investors. What was one of India’s biggest global acquisitions was met with tepid market response.
Two days later, in an interaction with the media, the Apollo Tyres management tried to allay all apprehensions. Neeraj Kanwar, Vice Chairman and Managing Director, Apollo Tyres reiterated that the acquisition was a de-risking strategy for the company – a move that would give Apollo access to two of the largest automotive markets globally – the United States and China.
Explaining the rationale, Kanwar said the company now acquires a low-cost footprint close to the most important global end-markets, in addition to a set of complementary products and brands. Moreover, the acquisition helps Apollo reduce its dependence on one market (read India) and become a diversified global tyre company.
But first, details of the deal: the terms of agreement promise Cooper stockholders $ 35 per share in cash for the acquisition that is expected to be completed within the second half of 2013. The closure of the deal will see Cooper becoming a privately held company.
The combined entity will result in Apollo Tyres becoming the seventh largest tyre company in the world – the largest by revenues in India, and the fourth largest tyre company in North America. Combined pro forma sales (2012) stand at approximately Rs 35,000 cr ($ 6.6 bn), with an EBITDA of $ 794 mn. Its presence in four continents across 14 manufacturing plants takes the total production capacity to 80 mn. The combined entity is expected to deliver additional value in the range of Rs465 to 700 cr per annum at the EBIDTA level, in three years from now.
It must also be noted that in May this year, Apollo Tyres had announced a transaction with Sumitomo Rubber Industries (SRI), by which SRI would take over Apollo Tyres South Africa (ATSA), including the Ladysmith passenger car tyre plant. The 80 mn capacity is adjusted for this potential sale. Apollo meanwhile, will retain the Durban plant that manufactures truck & bus radial tyres and off-highway tyres used in the mining and construction industries.
The Cooper acquisition makes strategic sense for the Indian tyre behemoth from a market accessibility perspective. Both companies have almost no geographic overlap, leaving immense potential for growth. The combined company will be uniquely positioned to address large, established markets, such as the United States and the European Union, as well as the fast-growing markets of India, China, Africa, and Latin America where there is significant potential for further growth, Kanwar said. “Our combined portfolio of brands and products will be amongst the most comprehensive in the industry.”
As per the financial plan disclosed by Kanwar, Apollo India has a manageable debt load, which it can meet from its cash flows. As much as 85 % of the $ 2.5 bn debt is not guaranteed by Apollo Tyres Ltd, and would have exposure to the company’s overseas arms in the US and Europe. “We will raise $ 1.9 bn through issue of bonds largely in the US market, and another $ 200 mn will be brought in via asset-based lending,” said Sunam Sarkar, Chief Financial Officer and Wholetime Director of the company. Its India business would service around $ 450 mn.
Additionally, the proceeds of around $ 40-50 mn from the South African sale would also go towards reducing the debt. “The banks have fully underwritten the amount. The interest coverage for both the entities is comfortable. There is hardly any risk,” said a confident Kanwar.
Although the Cooper acquisition is considered to be a high-risk deal for Apollo Tyres, strategically, this could be a master stroke from the 40-year-old company. Together, they’ll have 50 % of its manufacturing in low cost countries. Moreover, the 55:45 revenue prospect from high-margin western markets and high-growth emerging markets, reflects a sound business strategy prepared for the future.
Text: Deepangshu Dev Sarmah