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Apollo

In: Business and Management

Submitted By RahulChawla
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Rationale behind the acquisition 1) This strategic combination will bring together two companies with highly complementary brands, geographic presence, and technological expertise to create a global leader in tire manufacturing and distribution. 2) The combined company will be the seventh-largest tire company in the world and will have a strong presence in high-growth end-markets across four continents. With a combined $6.6 billion in total sales in 2012, the combined company will have a full range of brands and greater ability to satisfy customer needs worldwide. 3) The combination is expected to deliver value creation benefits of approximately $80-120 million per annum at the EBITDA level. 4) The combined company will be uniquely positioned to address large, established markets, such as the United States and the European Union, as well as the fast-growing markets of India, China, Africa, and Latin America where there is significant potential for further growth. Our combined portfolio of brands and products will be amongst the most comprehensive in the industry.
Funding the Cooper Deal
In a deal that will make Apollo Tyres the world's seventh-largest tyre maker by revenue, the Onkar S Kanwar-promoted company will acquire a 100% stake in US-based tyre manufacturer Cooper Tire & Rubber Company for $2.5 billion, or around R14,500 crore. Apollo would fund the acquisition fully by raising fresh debt.
The deal would be largest acquisition by an Indian company from the automotive sector, beating Tata Motors' acquisition of Jaguar Land Rover in 2008 for $2.3 billion.
The deal will be an all-cash transaction where in Cooper's shareholders will receive $35 per share, a 40% premium to the 30-day volume-weighted average price. Cooper Tires is listed on the NYSE. The deal is valued at 4.4 times the Ebitda of Cooper.
After the conclusion of the deal, Cooper will be delisted and privately held by a wholly-owned subsidiary of Apollo. Although Cooper has a large shareholding of mutual funds, Apollo said that Cooper's board is agreeable to the deal and has recommended the offer to shareholders.
Apollo, which has a debt-to- equity ratio of 1:1, will be raising $2.5 billion of new debt. Of the total new debt that will be raised, $2.1 billion will be backed by the cash-flows and assets of Apollo's European subsidiary as well as Cooper's cash flows and assets.
"Out of the total debt that is being raised $1.8 will be through bonds which have 7-8 year term, $300 million will be through asset-backed leveraging, all of this will be dollar loans raised by our European and international operations," said Neeraj Kanwar, vice-chairman and MD, Apollo Tyres. "A further $400 million will be raised on the back of our Indian cash flows."
The Apollo parties have obtained committed debt financing from Standard Chartered Bank for $450.0 million and committed debt financing from Morgan Stanley Senior Funding, Inc, Deutsche Bank AG New York Branch, Deutsche Bank AG Cayman Islands Branch, Deutsche Bank Securities Inc, Goldman Sachs Bank USA and Standard Chartered Bank for $2.375 billion, consisting of a $1.875 billion bridge facility and a $500 million revolving credit facility.
New Debt
Apollo Tyres’ exposure to new debt will be about $450 million, Sarkar said. The companies will also raise some funds with asset-backed loans, he said.
The size of the deal is more than three times Apollo Tyres’ market value of about 37.6 billion rupees.
The four banks that will help arrange the funds are Standard Chartered Plc, Morgan Stanley, Deutsche Bank AG and Goldman Sachs Group Inc., according to a joint statement issued by the two companies.
Sullivan & Cromwell LLP and Amarchand & Mangaldas & Suresh A Shroff & Co. served as legal advisers to Apollo Tyres. BofA Merrill Lynch served as financial adviser and Jones Day served as legal adviser to Cooper Tire, according to the statement. Morgan Stanley and Deutsche Bank also served as financial advisers to Apollo Tyres.
Cooper Tire will be delisted from the New York Stock Exchange after the completion of the acquisition, the two companies said in the statement.
Brokerage Views- 1) Kotak Institutional Equities
Given the inherent margin volatility in the tyre business and the leverage involved, the transaction clearly involves excessive risk downgrading the stock to "reduce" from "buy". It Apollo's stock target price to Rs 64 from Rs 110, citing significant risk to future cash flows and earnings of the company due to the heavy debt burden. 2) Emkay Global
Kaushal Maroo and Siddhartha Bera of Emkay Global, too, see the acquisition as a risky one. “We would AVOID Apollo for now given the expensive acquisition and little room for error,” the analysts noted.

3) Prabhudas Lilladher Pvt. Ltd
"We are concerned about the huge debt burden," said Surjit Arora, an analyst at Prabhudas Lilladher Pvt. Ltd., an Indian brokerage. Cooper's revenue is 2.5 times that of Apollo, and "the market won't like the huge leverage being taken by company," he said.
Synergy between Cooper and Apollo
The synergies could be in the form of operational or financial synergies. The following points illustrate, broadly, the synergies between Apollo and Cooper.
Operating synergy: * Economies of scale : The combined entity will have advantages in terms of cost-efficiency through raw material procurement * Higher growth : The combined firm will be able to introduce products and brands in each other's markets * Functional strengths: The two companies bring their strengths in technology, R&D and other functional areas where there could be overlap
Financial synergy: * Debt capacity: The combined firm will have more capacity to take debts. In this case, the holding company will issue bonds worth $2.1 billion, which would be serviced by Cooper and its European operations. The rest, $450 million, will be raised at its Mauritian subsidiary and will be serviced by the Indian operations
Price paid for the synergy
The book value of equity of Cooper = $815.9 M[1]
Market value of Cooper before acquisition = 63.34 M[2] * 24.56[3]= $1553.6 M
Acquisition price of Cooper = 63.34*35 = $2216.9 M
Premium paid for acquisition = $661.2 M
The management estimates that they will be able to generate savings in the range of $80 M-$120 M per year from the third year onward.
Assuming managements’ best estimate of $120 M in saving, we valued synergy, and it comes around $700.5 M[4]
It seems that the premium of $661.2 M paid was reasonable. Why did Investors punish Apollo then?
The answer lies not in the premium paid, but the way it is paid i.e. the huge debt burden that could strain the balance sheet of the combined entity
Effect on stock prices after the merger
Apollo Tires-
MUMBAI Shares in Apollo Tyres Ltd fell sharply on Thursday after a $2.5 billion deal to buy U.S.-based Cooper Tire & Rubber Co raised concerns about the company's debt.
Apollo will fully fund the purchase through new debt, raising the post-acquisition leverage for the combined entity to 3.8 times net debt/EBITDA (earnings before interest, tax, depreciation and amortisation) from 1.4 times now, according to analysts' estimates.
Apollo shares ended with down 25.45 percent at 68.55 rupees.
The acquisition would form the world's seventh largest tire company and give Apollo a foothold in the top two auto markets, China and the United States.
Goldman Sachs said in a report Apollo's net debt-to-equity ratio would rise even though Cooper would service a significant portion of the additional debt the Indian company would take to finance the deal.
"We believe execution is key in order to generate stable margins particularly amid a volatile demand and raw material environment, and reduce leverage over time," Goldman Sachs analysts wrote.…...

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