Apollo Tyres’ acquisition of Cooper Tire looks “risky”

Analysts say management will have little room for error given the high leverage ratio.
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Cooper is the fourth-biggest tyre maker in the US
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<div style="text-align: left;"> Cooper is the fourth-biggest tyre maker in the US </div>

India’s Apollo Tyres’ planned purchase of Ohio-headquartered Cooper Tire & Rubber for about $2.5 billion in cash looks expensive according to analysts.

Cooper stockholders will receive $35 a share in cash and the deal represents a 40% premium to Cooper’s 30-day volume-weighted average price, the companies said on Wednesday.

Analysts say that at 4.7 times their current estimates for enterprise value over earnings before interest, taxes, depreciation and amortisation (Ebitda) the deal looks expensive and would put pressure on earnings margins going forward, particularly given that the outlook for demand for tyres globally is sluggish.

The buyout will be funded through debt and after completion net debt divided by Ebitda would be about 3.8 times. Analysts at Mumbai-based Emkay Global Financial Services dubbed it a “risky acquisition” since management would have little room for error given the high leverage ratio. Emkay advised investors to avoid buying Apollo’s shares for now, given the expensive acquisition and management’s small room for error in living up to expectations.

Apollo, founded in 1972, has a portfolio of brands, including the flagship Apollo brand and Vredestein.

Cooper, the 11th-largest tyre company in the world by revenue, was founded in 1914 and supplies tyres worldwide through brands such as Cooper, Mastercraft, Starfire, Chengshan, Roadmaster and Avon.

The combined company would be the seventh-largest tyre company in the world with $6.6 billion in sales in 2012 and would have a presence across four continents.

The companies expect the deal to create synergies of about $80 million to $120 million a year at the Ebitda level within three years.

Cooper will continue to be led by members of its current management team. Both boards of directors unanimously approved the deal.

“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,” says Onkar Kanwar, chairman of Apollo.

“This is a compelling transaction that is in the best interest of Cooper’s stockholders and offers attractive benefits to our customers and employees,” says Roy Armes, Cooper’s chairman, chief executive officer and president

The deal is expected to close in the second half of 2013, assuming regulatory approvals and approval by Cooper’s stockholders.

Morgan Stanley, Deutsche Bank and Greater Pacific Capital were financial advisers for Apollo. Standard Chartered provided of transaction financing to Apollo Tyres and is also the structuring adviser. Sullivan & Cromwell and Amarchand & Mangaldas & Suresh A Shroff & Co were legal advisers to Apollo.

Bank of America Merrill Lynch was financial adviser and Jones Day served as legal adviser to Cooper.

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