A day after Apollo Tyres announced the Cooper Tire buy for Rs 14,500 crore, the scrip of India’s No 2 tyre-maker plunged 25 per cent to Rs 68.60 on the BSE mainly on fears of the huge debt the company will have to take on.

To fund the acquisition, Apollo plans to raise $2.5 billion through a consortium of Morgan Stanley, Deutsche Bank, Goldman Sachs and Standard Chartered Bank.

“The size of the deal is bigger than the company’s market cap of $800 million right now and it is entirely funded through debt as well. All investors are worried and it will take at least 2-3 years for the company to perform well,” Yaresh Kothari, auto analyst at Angel Broking, said

Analysts also said the outlook will depend on the prices of raw materials such as natural rubber, nylon fabric and, more importantly, the rupee’s value against the dollar.

“Though Cooper seems a good strategic fit, Apollo is paying a huge price for it and, hence, gaining synergies and the timeline of achieving it is important. We also await more visibility on the complex funding structure and approval process in the next few months,” Ashwin Patil of LKP Research said.

He said Apollo’s take over of Vredestein’s operations in 2009 paid off, as it was from a loss-making company and, therefore, at a reasonable price.

Cooper stockholders will receive $35/share in cash, which is at a 40 per cent premium to Cooper’s 30-day volume-weighted average price.

According to Kotak Institutional Equities, as the size of the transaction is very large vis-a-vis the current operations, it could swing either way for Apollo. “We will review our rating and target price after a detailed discussion with the management,” the research firm said in its report.

Apollo, according to Credit Suisse, will now put on hold plans of greenfield expansion in Eastern Europe and South-East Asia (since Cooper is already present in these regions).



(This article was published on June 13, 2013)
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