By Bruce Davis, Tire Business staff
AKRON (June 14, 2013) — Financial analysts who follow Apollo Tyres Ltd. are calling the Indian company's $2.5 billion bid to buy Cooper Tire & Rubber Co. "overambitious" and "risky," based on the amount of debt Apollo will incur.
Reflecting the uneasiness among Apollo shareholders, the Indian company's stock dropped 25 percent in value on June 13, the day the deal was announced.
"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," wrote the analysts at Emkay Globay Financial Services Ltd. in Mumbai, India.
According to Emkay and LKP Securities of Mumbai, Apollo — which is half the size of Cooper — intends to raise the funds for the purchase by issuing bonds through a Dutch holding company involving its Apollo Vredestein business in Europe and Cooper and backed by the companies' assets.
This venture would raise between $1.9 billion and $2.1 billion, the financial service firms said, while Apollo will raise the rest via unsecured debt. LKP said in its analysis it expects Apollo to sell bonds in the U.S. market with a likely seven- to eight-year maturity and a funding cost of approximately 10 percent.
Apollo has yet to disclose details of how it intends to raise the capital needed to fund the deal, saying only it has the backing of Standard Chartered P.L.C., Morgan Stanley Senior Funding Inc., Deutsche Bank Securities Inc. and Goldman Sachs Bank USA.
When asked about the financing for the deal, Cooper Tire Chairman, CEO and President Roy Armes said the board expressed its confidence after looking at the companies backing the deal.
Analysts from LKP Securities called Apollo's move "overambitious" considering the level of debt required and the global market situation.
The two securities firms estimate the new company's enterprise value-to-EBITDA ratio would settle in at roughly 3.8 to 4.4, depending on the earnings estimates. By contrast, LKP puts Apollo's EV/EBITDA ratio for fiscal 2012 at 6.2.
EV/EBITDA is a valuation multiple used regularly by the financial community to measure the value of a company. EV is defined by various sources as the estimated cost of acquiring an enterprise's core cash flow.
A lower EV/EBITDA ratio relative to a given company's peers indicates a firm that's undervalued.
Both securities houses point to the firms' contention that the merger will generate up to $120 million in synergy savings a year and the combined company will enjoy above-average growth by opening new markets and exploring cross-market sales opportunities as reasons Apollo management is counting on for the venture's success.