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The acquisition of Cooper Tire of the United States for $2.5 billion in cash has transformed Gurgaon-headquartered Apollo Tyres from a largely Indian company to a global one with manufacturing facilities in China, India, Mexico and Serbia, and three brands in its portfolio: Apollo, Vredestein and Cooper. Once the acquisition is completed, Apollo Tyres will become the seventh largest tyre maker in the world. For its Vice-chairman and Managing Director, Neeraj Kanwar, too, it has been a huge improvement in profile: he can take credit for pulling off one of the largest overseas acquisitions by Indian companies in recent times.
The public face of Apollo Tyres for long was Onkar Singh Kanwar, the chairman of the company and Neeraj Kanwar's father. It was Kanwar Senior who battled bankruptcy, labour strife and a series of broken technology pacts with international players to make Apollo Tyres one of India's leading tyre makers. Now, his son wants to take it global. This is where the Cooper acquisition fits in. Kanwar is undeterred by the concerns raised by institutional investors and sector experts about the financing of the deal and the challenges of integration.
"If you see the tyre industry, scale does matter, a global footprint does matter. We are not just out there shopping. We have carefully seen the market and Cooper was the best marriage for both companies," says Kanwar. To be fair, scale has been on Apollo Tyres' radar screen for a while. Many years ago, it was one of the suitors when Modi Rubber was on the block. But the sale never happened. Later, the company acquired Dunlop in South Africa and Vredestein in the Netherlands. In 2005-06, Kanwar toured Sri Lanka to study the possibility of setting up a factory there. But the size of the local market was too small to justify a full-fledged production unit. He has also been in discussion with the authorities in Thailand to put up a plant there. Meanwhile, the Cooper acquisition happened. Kanwar says that doesn't spell the end of the Thailand project. "I am still keeping (the) Thailand (option open). I will see what needs to be done. We had identified the land and negotiated with the government. We still have to finalise it," says he.
The acquisition of Cooper, the world's eleventh-largest tyre company by sales, will give Apollo access to the US market for replacement tyres for cars and light and medium trucks. The deal would allow Apollo brands to penetrate the market in China, the largest in the world for commercial vehicles. The company overall would gain footprint across four continents with 14 manufacturing facilities globally after the completion of the acquisition. Of this, approximately 50 per cent of the manufacturing units will be in low-cost countries-China, India, Mexico and Serbia. Cooper has 40 per cent of its production bases in low-cost countries such as China, say executives at Apollo Tyres, with potential for capacity expansion. Production levels would more than double to 3,500 tonnes per day from 1,500 tonnes currently.
Keeping it local
Kanwar says, more importantly, the merger would enable Apollo Tyres to realise its philosophy of near-sourcing -80 per cent of a plant's produce should be for the near market and 20 per cent for distant ones. "It is not viable to ship tyres all the way from India and South Africa to Brazil. It becomes very expensive for us, so you need near-sourcing. That's why a global footprint becomes very important. China will look after China and Southeast Asia; India will serve India and West Asia; Europe will produce for Europe, and America for America." The Cooper facility in Serbia would further help Apollo to enter CIS (Commonwealth of Independent States), where both the brands are not present currently.
An investment plan is being readied for the manufacturing unit owned by Cooper in Serbia. When Cooper took over, Serbia was producing one million units. There is some capex that has gone in that is taking the plant to 2.5 million. The plan is to take that plant to five-six million units. "So, we will expand Serbia for Russia and for Europe to get a fully global manufacturing footprint," adds Kanwar. India figures low on Kanwar's capex plans.
The added benefit of the merger, Kanwar says, would stem from de-risking the business from a single geography. Apollo Tyres, which currently does not operate in the US, gets two-thirds of its revenue from India, where a weak economy has hurt the demand for cars and commercial vehicles. "India is a difficult story... You have to de-risk. That's why, now, if you see the whole pie of Apollo, 43 per cent is North America. India, which was 65 per cent earlier, is down to 22 per cent. China is 18 per cent," Kanwar says. The combined entity would get 40 per cent of its revenues from emerging markets. The remaining 60 per cent would largely come from high-profit pools in Europe and America.
Kanwar also has clear brand architecture in mind: Apollo is present across the value chain with tyres for trucks, tractors and passenger cars, while Vredestein is present only in the ultra-high performance car and farm segments and Cooper plays in light trucks, SUVs and passenger cars. "You can't make a truck with a Cooper or with a Vredestein. So you will have Apollo as a premium brand for truck tyres and that will be sold all over," says Kanwar.
The Apollo management expects combination benefits of Rs 465 to Rs 700 crores ($80-120 million) over the next three years at the Ebitda level from the deal, mainly due to sourcing benefits, product optimisation, operating scale and manufacturing improvements. But given the nature of the deal, implementation and integration of operations at the two entities will be critical to deriving the benefits, say industry experts.
Integration challenges
Cultural integration can particularly be a sore point for a company, which would be adding on Cooper's existing facilities across geographies. "I had been warned of cultural integration when I went into South Africa. Given that experience, today our USP is integration of cultures. If you are able to do that well, the performance is that much better. Whether you get on to the shop-floor does not matter, but 80 per cent is cultural integration. If you can do 80 per cent of that integration with two cultures to match, you have done the job," agrees Kanwar. However, he adds a caveat that in Holland, cultural integration with the Dutch had been a more difficult experience for him.
"But you have seen the results. When we took over Vredestein, Ebitda margin was 11 per cent; last year, it was 18 per cent. So it is fair to say we have done something good there. With Cooper, we have been dealing with the American team for six years. So I don't see any issues. Yes, it takes time but will happen", he adds. The Cooper buy-out is Apollo's third major overseas acquisition after Dunlop South Africa for Rs 290 crore in 2006, which it sold to Japanese Sumitomo Rubber Industries for Rs 340 crore last month, and Vredestein.
Experts at Credit Suisse agree the company's Dutch acquisition, Vredestein, has worked for it as it was bought from a bankrupt company (Russia's Amtel) at a very reasonable valuation. Apollo acquired the Netherlands-based winter-tyre maker, Vredestein Banden BV, for an undisclosed sum in May 2009. Vredestein, which was ring-fenced from the Amtel bankruptcy, saw its profitability increase after the acquisition following the implementation of raw material sourcing pacts and research and development programmes at the company to boost efficiency.
Cooper, too, is a good strategic fit for Apollo, say analysts at Credit Suisse, but they add that any upside would depend on the kind of synergies it can get, particularly amid a volatile demand and raw material environment globally. Moreover, there are concerns over pricing stability in the US, given the surge in competition there, especially from the Chinese and Japanese players. As regards Apollo Tyres' ability to take on higher debt, which has put the market in a flurry, Kanwar says firmly there are no risks. According to the financing plan outlined by the company, as much as 85 per cent of the $2.5 billion debt would have exposure to Apollo's overseas arms in the US and Europe. While $1.9 billion would be raised through issue of bonds largely in the US market, another $200 million will be brought in via asset-based lending. Its India business would service around $450 million. Following the acquisition, the net debt of Apollo's India business is set to increase to $800 million from $354 million as of March 31, 2013. The standalone net debt to equity ratio is projected to increase to 1.9 from the current 0.8.
