Apollo Tyres Ltd. plunged the most in more than two decades in Mumbai trading, wiping out a quarter of its market value, after agreeing to acquire Cooper Tire & Rubber Co. for about $2.5 billion.
Apollo Tyres, based in Gurgaon, India, fell 25 percent, the biggest drop since Jan. 1991. Cooper Tire shares surged 41 percent yesterday in New York. Apollo Tyres, which will fund the purchase through borrowings, said it will pay $35 a share to Cooper Tire shareholders. That’s 43 percent higher than the June 11 closing price of $24.56.
Apollo Tyres, which last month agreed to sell most of its South African operations to Sumitomo Rubber Industries Ltd. for $60 million, is looking to offset slower automobile demand in India and Europe amid weaker economic expansion. The company, which has said it wants to be among the top 10 tiremakers by 2016, would enter the U.S., the second-biggest auto market, where deliveries are on pace for the best year since 2007.
“We see this as a risky acquisition as the management would have little room for error given the high leverage, very little synergy benefits and the poor demand environment currently,” Kaushal Maroo and Siddhartha Bera, analysts at Emkay Global Financial Services Ltd., wrote in a report yesterday after the deal was announced. Emkay said it has put under review its earlier recommendation for holding the stock.
Apollo Tyres fell 25 percent to 68.55 rupees at the close in Mumbai. Cooper Tire shares rose to $34.66 at the close in New York yesterday.
The deal would be the biggest takeover of an auto-parts maker since 2007, according to data compiled by Bloomberg.
The acquisition will provide “scale and geographical presence including the American and European market, that’s a mature market, and India and China that’s a growing market,” Neeraj Kanwar, vice chairman of Apollo Tyres, told reporters at a briefing yesterday in Gurgaon. The companies expect the deal to close in the second half of the year.
“These kinds of cross-border transactions, suppliers from different countries investing in each other’s markets, is always good for the industry,” Sanjeev Varma, managing director of Stellar Alliance Group LLC, a Troy, Michigan-based automotive industry consultant, said in an interview yesterday.
Apollo Tyres and Findlay, Ohio-based Cooper Tire will borrow money from four banks, Apollo Tyres Chief Financial Officer Sunam Sarkar said. The two companies will jointly raise $2.1 billion from the sale of high-yield bonds with maturity of as long as eight years, he said.
Apollo Tyres’ exposure to new debt will be about $450 million, Sarkar said. The companies will also raise some funds with asset-backed loans, he said.
The size of the deal is more than three times Apollo Tyres’ market value of about 37.6 billion rupees.
The four banks that will help arrange the funds are Standard Chartered Plc, Morgan Stanley, Deutsche Bank AG and Goldman Sachs Group Inc., according to a joint statement issued by the two companies.
Sullivan & Cromwell LLP and Amarchand & Mangaldas & Suresh A Shroff & Co. served as legal advisers to Apollo Tyres. BofA Merrill Lynch served as financial adviser and Jones Day served as legal adviser to Cooper Tire, according to the statement. Morgan Stanley and Deutsche Bank also served as financial advisers to Apollo Tyres.
Cooper Tire will be delisted from the New York Stock Exchange after the completion of the acquisition, the two companies said in the statement.
Cooper Tire has gained 37 percent this year, compared with a 14 percent increase for the Russell 2000 Index.