Please refer to important disclosures at the end of this report
Apollo Tyres (APTY) and Cooper Tire and Rubber Company (CTB) haveannounced a definitive merger agreement, under which APTY will acquire CTB inan all cash transaction valuing the firm at US$2.5bn (including minority interest). APTY will acquire 100% equity of CTB for an equity valuation of US$2.2bn, ie at a43% premium to CTB
day volume weighted average price. The acquisitionwould be funded entirely through debt. The deal value of US$2.5bn translatesinto an implied EV/EBITDA multiple of 4.4x (TTM basis), which is broadly in-linewith the global average. Post the acquisition, the combined entity will be the7
largest tyre company in the world with combined revenues of US$6.6bn. Thecompany expects to close the transaction in the next four months.
APTY’s Management ha
s stated that the CTB acquisition would befunded entirely through debt, the cost of which would be less than 10%. Thecompany is planning to raise US$2.1bn of debt via issuing high yield bonds(duration of 7 to 8 years) at the European holding company which would houseCTB and the existing European operations (Vredestein). This debt would beserviced by operations of CTB and Vredestein. The remaining US$450mn wouldbe housed at the Mauritius subsidiary and would be serviced by the Indianoperations.
Benefits of the acquisition:
The CTB acquisition augurs well for APTY as it would
geographical footprint and provide immediate access to two of the
world’s biggest markets,
North America and China. Further, it also provides thecompany with manufacturing presence in cost efficient locations like China andEastern Europe. APTY expects to incur synergy benefits of US$80-100mn over aperiod of three years, arising out of common sourcing of raw-materials,technological and R&D benefits and reduction in administrative
Management expects the acquisition to be EPS accretive from the first year itself.
Implications in the short term:
While the acquisition appears to be a goodstrategic fit for APTY in the long run, concerns regarding the large size of
acquisition, substantial increase in leverage and the Management’s ability tosuccessfully integrate the operations has led to a ~30% correction in APTY’s stock
price since the deal has been announced. According to the Management, post theconsolidation, the consolidated net Debt: Equity is expected to jump sharply to~2x from 0.6x currently. We believe that the execution would be the key thinggoing ahead, as successful execution will lend stability to the operations and leadto lower leverage over time. Additionally, sustainability of margins of CTB (EBITDA margins have been in the range of 7.5%-12.5% over the last three years) wouldbe very important given the obligation of servicing the huge debt that thecompany would be undertaking. Assuming EBITDA margins of 12% at CTB andcost of debt at 9%, we expect earnings accretion to the tune of
6/share inFY2014E as a result of the consolidation. However, a 200bp-250bp contractionin EBITDA margins at CTB would be negative for earnings. Post the acquisition,the revenue stream of the combined entity would transform completely and wouldbe dependent more on the global automotive cycle as the share of the domesticoperations to total sales will come down from 65% currently to 22%. Further,exposure t
o foreign currency debt would mean that the company’s financials
would be exposed to the fluctuations in the currency prices (actual impact in caseof interest payments and notional adjustments in case of balance sheet items).
65Target Price -
Investment Period -
Stock InfoSectorBloomberg CodeShareholding Pattern (%)Promoters43.4MF / Banks / Indian Fls14.4FII / NRIs / OCBs29.2Indian Public / Others13.0 Abs. (%)3m1yr3yrSensex(2.0)15.010.6 Apollo Tyres(26.3)(18.6)(3.7) APTY@INFace Value (
)BSE SensexNifty Reuters CodeTyre Avg. Daily VolumeMarket Cap (
cr)Beta52 Week High / LowNet Debt (
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Acquisition of Cooper Tire
Event Update | Tyre
June 14, 2013