 "Apollo's global plans ride on Cooper")
But even as the market frets over the company's bandwidth to attain synergies with Cooper (which is three times its market cap) and take on higher debt, Apollo Tyres Vice-chairman and Managing Director Neeraj Kanwar is positive of the benefits the merger would accrue to what is set to grow into India's largest tyre company.
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. However, Kanwar says a blueprint is being readied to reduce the exposure of domestic business to overseas debt.
The proceeds of around $ 40-50 million from the sale of Dunlop South Africa, its tyre manufacturing unit in South Africa, would go to reduce the debt. Possible dividends from the overseas arms could also be used to service debt in India. "The debt loads are manageable both in India and overseas, which can be met from cash flows. The banks have fully underwritten the amount. The interest coverage for both the entities is comfortable. There is hardly any risk," says Kanwar
The Apollo management expects combination benefits of Rs 465 to Rs 700 crores ($80-120 million) per annum 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 analysts.
Past precedent
Kanwar is confident of the acquisition having a positive impact on the company. "We have experienced similar trends for our earlier acquisitions, especially when we bought Dutch tyre maker Vredestein Banden in May 2009. We have a strong track record of synergy realisation; after the acquisition in Europe, Apollo Tyres has increased its Ebitda margins to 18 per cent from 11 per cent between 2008 and 2012," Kanwar says.
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. In Cooper, the company would have rights over all brands globally. Cooper supplies premium and mid-tier tyres worldwide through brands such as Cooper, Mastercraft, Starfire, Chengshan, Roadmaster and Avon.
Analysts 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 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.
If Apollo has to make its acquisition count from day one, there is zero room for error, says Yaresh Kothari, research analyst, Angel Broking. "The merger will be beneficial in the long run as the geographies, products, brands of the two companies are complementary. The acquisition will give Apollo indirect entry into high-profit markets in the US and China. However, unfavourable rubber price movement may put a strain on cash flows of the combined entity. Also, the synergies from integration are expected to be realised in 2 to 3 years and stock markets are concerned about the uncertainties riding with the merger," he says.
Kanwar, however, is confident that the scale of the combined business together with low-cost footprint close to the most important global end-markets will improve profit margin. The two companies- the combined sales figures of which stood at $6.6 billion in 2012-would together form the seventh-largest tyre company in the world. "This strategic combination will bring together two companies with highly complementary brands, geographic presence, and technological expertise to create a global leader in tyre manufacturing and distribution. The diversified nature of the business would help insulate Apollo from a slowdown in any one geography," says Kanwar.
Apollo Tyres, which currently does not operate in the US, gets two-thirds of its revenue from India, where a weak economy has hurt demand for cars and commercial vehicles. The acquisition of Cooper, the world's 11th-largest tyre company by sales, would give it access to the US market for replacement tyres for cars and light and medium trucks. The deal would also give Apollo brands access to 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. Cooper has 40 per cent of its production bases in low-cost markets 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.
After the acquisition, India's contribution to Apollo's overall revenues will come down to 22 per cent from 65 per cent at present. The US will account for 43 per cent of the revenue, while China and Europe will have a share of 18 and 12 per cent, respectively. Kanwar says, "We estimate that Apollo will gain approximately 55 per cent of revenues from high-margin western markets and around 45 per cent from high-growth emerging markets, which would enhance our geographical mix."
The close of the transaction-assuming timely regulatory approvals and other customary closing conditions as well as approval by Cooper's stockholders-is expected to take place within the second half of 2013, says Apollo Tyres Chief Financial Officer Suman Sarkar. Cooper will become a privately-held company and its common stock will no longer be traded on NYSE. Cooper will continue to be led by members of its current management team and operate out of its facilities around the world.