Acquisition to propel Apollo Tyres in top-10 orbit!! - ICICIdirect

Apollo Tyres (APOTYR) has announced its plan to buy U.S. based Cooper Tire & Rubber Company (CTR), world's 11th largest tyre manufacturer for $2.5 billion. Apollo Tyres will pay $35 per share, which represents a premium of 43% on Tuesday's closing price. The acquisition will propel Apollo to the world's seventh largest tyre manufacturer position in terms of sales ($6.6 billion). The deal which remains subject to Cooper shareholder and regulatory approvals will be financed by taking on debt of $2.5 billion. The merger will be margin accretive for Apollo Tyres as Cooper's operating margins are superior to Apollo's consolidated margins. However, with Apollo paying top dollar in terms of valuation and a strong overhang of leverage of balance sheet post the acquisition, there is a short-term impact on Apollo's stock price. In the long-run, the synergies will play out and lead to further benefits in terms of common cost sourcing/ cross-selling through common distribution channels.

"Small steps needed to reinforce confidence in giant leap for Apollo"

The acquisition is perceived as being too large for Apollo to digest, and done at a huge premium. However, with CTR being a more profitable entity than Apollo Tyres, with significant presence in US and China, we believe Apollo Tyres is not overpaying at 4.4x FY13E EV/EBIDTA valuation for Cooper (APOTYR paid 4.3x for the Vredestein acquisition). The acquisition multiple is also in the median range of major comparable tyre players. The management has highlighted synergy benefits of ~$80-120mn accumulating over the next couple of years as per official advisors. However, the management's internal estimates for the same are much higher. The consolidated D/E post the deal would rise from 0.7x to 1.9x, which the management targets to bring down to 1x in next 3 years.

Market Shocked! Throws long term positives "outta" window!

Apollo's bold yet risky move to acquire a company almost double its size, has not gone well with the markets, leading to sharp fall, immediate derating. We are however, cautiously optimistic on CTR's abilities as it is a strong business and on ratios/margins is superior to APOTYR. The overhang of the acquisition vis-à-vis performance/execution/debt will need more clarity and we would wait till clarity emerges on the same before ascribing any target price, thus we keep the stock UNDER REVIEW.

Source : Equity Bulls

Keywords