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Share prices generally offer an immediate answer to the question of what the market thinks of a corporate event. Right or wrong, they give away the first reaction to an event. Thus the market reaction to Apollo Tyres' acquisition of the US-based Cooper Tire & Rubber can be seen from their stock prices.
The Indian market has clearly not appreciated this move by Apollo Tyres, hammering the stock down by 21 per cent to Rs 72.65 at 12.30 pm. On the other hand the price of Cooper Tire has jumped by 41 per cent to $34.66 a share catching up with the premium at which Apollo is buying the company. Apollo Tyre has bought the company for $2.5 billion, valuing it at $35 a share.
The road to big acquisitions by Indian companies is riddled with wounded promoters. The general belief is that Apollo Tyres has bitten more than it can chew, as was the case with Tata Steel.
Acquisition of a bigger company generally works either when the growth is linear, as in the case of pharmaceutical companies, or when it has been done at the start of a cycle, as in the case of Tata Motors. However, the problem with acquisitions in cyclical sectors is that the huge leverage to make the purchase is exposed at the time of a down cycle. Suzlon, Tata Steel and ArcelorMittal are gasping for breath after wrongly timing their acquisitions.
The market fear is that Apollo Tyre will go down the same route as the steel majors with its acquisition of Cooper Tire. On paper it might look like a marriage made in heaven, with no overlap of markets and strengths in various product lines.
Cooper Tire is largely a US-based player deriving 70 per cent of its revenue from North America and remaining from other parts of the world. It is the fourth largest tire manufacturer in the US and 11th largest in the world with a revenue of $4.2 billion in 2012. It has very little presence in the OEM (original equipment manufacturer) segment and has a 14 per cent market share in the US replacement market. It is debt free at the net level with cash and cash equivalent of $352 million and debt of $336 million. The company posted a net profit of $397 million (around Rs 2,303 crore) in 2012.
Compared to this Apollo Tyres, on a consolidated basis has a turnover of Rs 12,412 crore and posted a profit of Rs 412 crore. It already has a debt of Rs 2,549 crore and cash of Rs 173 crore.
Cooper Tire’s acquisition is expected to cost Apollo Tyre around Rs 14,500 crore, which the company claims will be raised through 7-8 year foreign currency paper as there is barely any cash in the company’s books.
On a comparative basis, Cooper Tire is twice the size of Apollo Tyres in terms of turnover and 5.5 times in terms of profit. Debt of Apollo Tyre will increase by nearly six time post the acquisition. As the company is planning to raise debt with tenure of 7-8 years, a major chunk of the profit generated by the two companies will go in for debt repayment. There will be little money left for growth capital, that too under the assumption that the company will make the same level of profit (in CY11 Cooper made a profit of $163 million or Rs 945.5 crore).
A Cooper Tire analyst presentation says that the company is going through tough times as it is facing competition from cheap imports from Asian, in its lower variety of tires. It had predicted sluggish demand in 2013 and warned of ‘continuing and new challenges’. Given this background the sell-off at a 40 per cent premium to Cooper Tire shareholders makes a lot of sense. But for Apollo Tyre shareholders, they will have to carry the huge debt burden for the rest of their life. No doubt they do not like the idea, as is reflected in the share price.
