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Gurgaon based Apollo Tyres announced on June 12 that it would acquire Ohio-based Cooper Tire in an all cash deal for USD 2.5 billion. The merged entity would become the seventh largest tire company in the world. Shares of Cooper gained 37 percent on the New York Stock Exchange while that of Apollo Tyres lost over 37 percent in the same week post deal announcement.
The reason for this- Apollo Tyres was buying Cooper at USD 35 apiece, three times its current market cap and at 40 percent premium.
In the past, big ticket acquisitions have not gone down well for the Indian companies. Tata Steel-Corus and Hindalco-Novelis are some examples wherein the acquirer even after several years post deal continued to reel under huge debt that was raised to fund acquisitions Investors and analysts were surprised by the Apollo’s plan to fund such a mammoth acquisition at a time when the interest rates are very high and rupee at all-time low.
After nearly three months, the deal has now taken a twist. It seems Apollo Tyres has realized that the Cooper deal is too much to handle and has now backed out of the deal citing Cooper failing to meet its contractual obligations. Both companies have filed several litigations in the US court and the outcome is still pending.
Analysts are of the view that the deal might be called off and the same is now reflecting in the share prices of both companies. Cooper Tire has lost all the gains and is now trading around the same level before the deal was announced. Apollo on the other hand has recovered nearly 15 percent of its lost ground. However, the stock is still down 21 percent from its pre-deal price.
Analysts on Dalal Street are now upgrading Apollo Tyres to ‘Buy’ from ‘Sell’ on hopes of deal fallout. At current market price, the stock is trading at a price to earning (P/E) multiple of 5.5 in contrast to P/E of 7.2 prior to the deal. If the deal does not happen, then analysts expect Apollo to trade at P/E of 7 (same levels before the deal) and the stock price will factor it in the coming days based on the developments. However, Apollo Tyres will have to pay USD 112.5 million in order to withdraw from the deal, while Cooper will have to pay a termination penalty of USD 50 million if it decides to do the same. In past three months, its peers like Ceat, MRF and JK Tyres have gained 27 percent, 8 percent and 6 percent respectively. It seems Apollo has to catch up a lot in the coming days.