Apollo Tyres to acquire US based Cooper Tire and Rubber - Angel Broking

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Apollo Tyres (APTY) and Cooper Tire and Rubber Company (CTB) have announced a definitive merger agreement under which a wholly-owned subsidiary of APTY will acquire CTB in an all cash transaction valued at ~US$2.5bn. Under the terms of the agreement approved by the boards of both companies, CTB shareholders will receive US$35/share which represents a ~40% premium to CTB's 30 day volumeweighted average price. The acquisition would be funded entirely through debt.

APTY plans to form a new holding company in Dutch involving Cooper and its European subsidiary, Vredestien, which would raise US$2.1bn debt via bonds. The major portion of the debt will be backed by assets of Cooper and Vredestien. The remaining debt of US$450mn will be raised at APTY's Mauritius subsidiary and serviced by its standalone business. The Management expects the cost of debt to be under 10% and has received commitment from the bankers regarding the loan. The Management expects to derive synergy benefits of US$80 - 100mn over a period of three years driven by scale of operations, raw-material sourcing, technology and R&D investments and manufacturing efficiencies. According to the company, the current management team at Cooper would be retained and APTY has no plans to close down any of the manufacturing facilities at the moment. The deal value of US$2.5bn translates into an implied EV/EBITDA multiple of 4.2x on CY2012 basis, which is broadly in-line with the global average. Post the merger, the consolidated Net Debt/ Equity would increase to ~3.8x from 0.8x currently.

CTB is the fourth largest tyre manufacturer in North America, and eleventh largest in the world. The company derives ~70% of its revenues from North America and ~30% from International operations (~7% from Europe and ~22% from China and South East Asia). CTB caters to the light vehicle replacement tire market in US and has a ~14% market share in the US. The company has also recently forayed into the OEM segment in US and China. With 9 manufacturing facilities across 4 geographies (US, UK Serbia and China), the total capacity of the company stands at 53mn tires/ year. The company registered revenues of US$4.2bn in CY2012 with EBITDA margins of 12.5%. On a net debt basis, the company is cash positive as of CY2012.

We see the acquisition to be a good strategic fit for APTY in the long run as it provides the company access to geographies like North America, China, South East Asia and Eastern Europe where it does not have a presence currently. Further according to the management, the acquisition is expected to be value accretive from year one and the management expects synergies of US$80-100mn over three year period. While the acquisition will be positive for the company in the longer run, the near term challenge for the company would be to successfully integrate CTB operations with itself. We are in the process of revising our estimates and therefore our rating is under review.

Source : Equity Bulls

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