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Stocks

Apollo Buys Out Cooper Tire for $2.5 Billion

Apollo Tyres will buy out US Listed Cooper Tire and Rubber Company (CTB) for $2.5 billion, the biggest Indian takeover of a US firm. This will make Apollo the world’s seventh largest tyre manufacturer, with 30,000 employees.

The problem? This deal is financed entirely through debt. Apollo isn’t putting a shred of equity into the takeover, choosing to

  • Have Cooper issue $2.1 billion worth of “junk” bonds, at interest rates between 6.75% and 9.5%
  • Have Apollo borrow $450 million equivalent in Indian rupees with a bank loan.

This sound great – infinite leverage! However, servicing the loan will cost $150 million to $200 million to Cooper, and then another $45 million to the Indian arm of Apollo. That could crunch the joint-company’s finances a little bit.

Cooper Tire has, in the last five years earned so much (pre-tax)

  • 2008: –253M
  • 2009: 116M
  • 2010: 157M
  • 2011: 134M
  • 2012: 369M

If you take out $200-$250M from each of the above, you end up with what sounds like stress.

However, you have to consider that the US auto industry is just recovering and people who didn’t buy cars in the last few years will end up having to replace their tyres (at least). The cycle could generate continuous revenue for Apollo-Cooper. Additionally, rubber prices have been trending down and look like they’ll stay down for the immediate future.

The Apollo stock in India has taken a beating, with prices dropping 38%. The chart below is only till Friday but today prices fell another 2%.

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Technically this doesn’t look all that great (Prashanth has a different opinion). But this might just turn out to be a useful buy with a 15% stop below, to bet on a rebound.

There have been many shareholder lawsuits against Cooper, saying that the board didn’t look at all options before selling out. It’s unlikely to affect anything, but if it does and the deal is off, Apollo’s stock should benefit.

In the long term, with the lack of Indian auto sales growth, Apollo has to look outside India’s shores. And when the American cycle turns sour, the Indian cycle will bloom (even Indian car tyres need to be replaced!) which gives the company a cushion on either side. The problem of the debt overhang, though, can get troublesome if things don’t work out to plan by the 7 to 8 year time frame when the company will have to return the money in a balloon payment.

Disclosure: No holdings. Considering a position.