The deal that never was: Apollo-Cooper fallout?

Oct 15, 2013, 09.12 PM IST

It was a proposed marriage than never seemed like one that was made in heaven. The near unanimous street verdict was that Apollo was trying to bite off more than it could chew.

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It was a proposed marriage than never seemed like one that was made in heaven. The near unanimous street verdict was that Apollo was trying to bite off more than it could chew.

Like this story, share it with millions of investors on M3

The deal that never was: Apollo-Cooper fallout?

It was a proposed marriage than never seemed like one that was made in heaven. The near unanimous street verdict was that Apollo was trying to bite off more than it could chew.

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The likelihood of the country's largest tyre maker Apollo Tyres finally acquiring US-based Cooper Tire & Rubber Company is getting dimmer by the day. The deal could face more impediments with Cooper Tire set to report lower than expected Q3 earnings.

It was a proposed marriage than never seemed like one that was made in heaven. The near unanimous street verdict was that Apollo was trying to bite off more than it could chew

Also read: Apollo lenders may not fund deal without price cut: Sources

How can one justify a leveraged buyout where the target generates nearly double the revenues of the acquirer? It now seems that the very rationale for the deal has gone awry reports CNBC-TV18's Ronojoy Banerjee and Animesh Das.

Apollo had justified the acquisition on the three following grounds :

1) Cooper's strong financials, which reported an EBITDA of USD 526 million in 2012.
2) A foothold in Asia where Cooper's revenues in 2012 stood at USD 1.3 billion apart from access to the Chinese market through two manufacturing facilities.
3) The strategic brand fit of Cooper in Apollo's portfolio which also owns premium tyre brand Vredestein

However, in the last four months the situation has changed drastically. A few backs Cooper reportedly lowered its EBITDA guidance for 2013 to just USD 257 million, which the lowest in the last four years.

According to sources July-September earnings could be lower than expected and Apollo could seek a further cut in the acquisition price as a result. If one adds to this the additional burden on Apollo as it seeks to meet demands of UnitedSteel workers in the US.

The biggest setback is the possible loss of the Chinese market where Apollo has no presence. China is the world's second largest end-market for tyres but with Cooper having little control over this business, the assets could be left out from the deal.

Analysts say if the Apollo management is able to convince Cooper to cut the per share price to USD8-10, the deal could still make sense. However, if Cooper is not agreeable to a price renegotiation, the deal may end up running flat.

On October 15, 2013, Apollo Tyres closed at Rs 65.05, down Rs 1.4, or 2.11 percent. The 52-week high of the share was Rs 101.50 and the 52-week low was Rs 54.60.

The company's trailing 12-month (TTM) EPS was at Rs 6.56 per share as per the quarter ended June 2013. The stock's price-to-earnings (P/E) ratio was 9.92. The latest book value of the company is Rs 46.24 per share. At current value, the price-to-book value of the company was 1.41.

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