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Apollo Tyres defends Cooper buy, calls acquisition a de-risking strategy

Apollo Tyres called a press conference to allay fears of investors and talk about the fallout of its $2.5 billion acquisition of Cooper Tire & Rubber Co in the US. The company's stock has dropped 30 per cent in two days.

Sunny Sen | June 15, 2013 | Updated 10:07 IST

Sunny Sen
Chairman and Promoter of Apollo Tyres Ltd, Onkar S. Kanwar, remained quiet for most of the time at the press conference Apollo Tyres called to talk about the fallout of its $2.5 billion acquisition of Cooper Tire & Rubber Co in the US. It was his son Neeraj Kanwar who did the talking.

It was one of the biggest buys by an Indian company overseas, but the market reacted adversely, with Apollo Tyres stock price dipping thereafter.

Neeraj clarified that the acquisition was a de-risking strategy by which Apollo would get access to the world's biggest auto market today, the US, as well as what was likely to be the biggest in the future - China.

Apollo Tyres MD Neeraj Kanwar during the news conference in New Delhi on June 14. PHOTO: Reuters

Explaining the contours of the all cash deal, Neeraj said Apollo India, the parent company, would take on a debt burden of only $450 million. The rest, $2.1 billion, will be taken by the new holding company.

In this leverage buyout, $1.9 billion will be through bonds completely underwritten by four international banks - Morgan Stanley, Deutsche Bank, Goldman Sachs and Standard Chartered.

In one of his few interventions, Onkar Kanwar reiterated, "We are ring fenced from the debt point of view... This is a leveraged buyout which can be done only in the US, not in India."

Neeraj mentioned a yearly interest outgo of $100 million from Apollo India and about $150 to $200 million from the holding company.

Apollo Tyres MD Neeraj Kanwar during the news conference in New Delhi on June 14. PHOTO: Reuters

At its current state of EBITDA, the coverage is 3.5 to 4 times the interest payout, underscoring the point that the company is financially stable enough to handle the debt. The promoters also mentioned that from the sale of a part of its South Africa operations, it will further be able to reduce the $450 million debt of the parent company.

The combined entity will have joint revenues of $6.6 billion, and will be world's seventh largest tyre maker. It will also get eight new manufacturing facilities.

Cooper has 70 per cent of its revenue coming from the US and 20 per cent from China, where Apollo will sell now. "We can sell Apollo branded truck tyres in the US," said Neeraj.

However, the biggest problem going ahead will be the integration of the two companies that have very different cultures.

Cooper is also a bigger company, almost double Apollo Tyres in revenue, having a workforce of 14,000. But the Kanwars are happy that for the present they have managed to pull off a deal which gives them new opportunities in world's two most important markets.

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