Investors happy as Apollo Tyres-Cooper Tire deal sours

Investors’ discomfort about the $2.5 billion deal—the largest such transaction by an Indian company in the automotive space—stemmed from the fact that the payout of $35 per share was struck at a huge 43% premium to the prevailing market price. Moreover, the leveraged buyout was to be fully funded by dollar-denominated debt raised by the two entities, which in turn would burden Apollo Tyres’s balance sheet.

 

Cooper Tires, in a court case filed last week, accused Apollo of delaying the deal while seeking a discount in per-share price to be paid to Cooper. Apollo’s grouse, that Cooper is unwilling or lacks enough control over the majority-owned Chinese subsidiary to be able to give the required information sought, is reasonable. After all, according to some analysts, the onus of providing all relevant information sought by the buyer of any asset to conclude a deal rests on the seller.

 

For now, trouble seems to be brewing at the Chinese subsidiary, where the management and workers do not seem happy with the change of order in the majority partner, if the Apollo-Cooper deal comes through. Even if this gets ironed out, the risks to the deal remain. No doubt, the deal would catapult Apollo to become the seventh-largest tyre maker in the world (currently 15th) with its combined revenue jumping to $6.6 billion within a couple of quarters. Apollo will gain strength in the passenger segment with Cooper’s top-notch brands and get access to new markets in the US, China and Africa. Recall that Apollo even sold its African tyre unit just before striking this deal.

 

Currently, Cooper’s cash flows seem sufficient to cover the huge $160 million interest outflow every year. But analysts worry that any adversities, like a rise in rubber prices or a slowdown in production/sales in any of its markets, could upset the apple cart and weigh down on the consolidated balance sheet and results of Apollo Tyres.

 

Hence, the Street would continue to give a thumbs up to the stock if the deal is called off, or if Coopers calls off the deal and ends up with a penalty payable to Apollo. The reverse could see the stock tumble again.