The day after news broke claiming that India’s Apollo Tyre was making a run at Cooper Tire & Rubber Co., there has been far more speculation than denial, bringing into question just what is happening.
While silence may be golden, the lack of comment – or even flat denial – from either party has led to all manner of speculation.
To recap, India’s Economic Times yesterday reported that Apollo Tyre “is in the process of acquiring” Cooper Tire & Rubber Co. The newspaper said that “sources with direct knowledge” stated that Apollo is working to acquire “a controlling stake in Cooper” in a deal that “could be in the range of $600 million to $800 million.”
Earlier this month, Apollo said it would raise some $150 million via “placement of shares to qualified institutional buyers.” The Economic Times said that, “Sources suggest that Apollo Tyres could be raising close to $600 million of debt,” and that the advisor to the deal “has already initiated the process.”
If such a deal came to pass, it would create a company with an estimated $6.1 billion in global sales – making it the world’s seventh largest tire company – with three major tire brands and a footprint that touches the U.S., Europe, South Africa, India and China.
For 2011, Cooper posted sales of 3.9 billion, placing it ninth on the global list, while Apollo, which also owns Vredestein, had sales of 2.2 billion, putting it in 16th spot, according to Tire Review data.
Responding to a request by Tire Review and other media yesterday, Cooper issued a simple one-sentence statement: “Cooper Tire has a strict policy of not commenting on rumors and speculation in the market.”
On the other side of the world, Apollo was equally tight lipped, not even issuing a “no comment” comment.
Buoyed by the rumors, Cooper shares, which had been trading between $12.21 and $23.40 over the last 52 weeks, closed yesterday at $19.78, up 6% from the day prior.
But some tire industry analysts did offer their thoughts. KeyBanc Capital Markets in Cleveland sent around a note outlining its take, suggesting that Cooper may draw other suitors:
“We have not received confirmation of Cooper’s willingness or unwillingness to sell to Apollo Tyres or any other strategic/financial buyer. We are hesitant to speculate on the sale of the company, but would be surprised to see CTB sell to Apollo as: 1) Apollo’s current capital structure isn’t great as the company has a net leverage ratio of 2.3x vs. Cooper at 0.5x and Apollo would have to issue additional debt and equity above current levels to obtain sufficient funds for a controlling stake; 2) while the acquisition of Cooper would be complementary from Apollo’s standpoint due to Cooper’s solid footprint in China and North America, we remain suspect of Cooper’s willingness to sell to a much more levered and smaller ($2.5 billion in sales vs. Cooper at $4 billion in sales) tire manufacturer with virtually no significant overlapping geographic footprint; and 3) cost synergies appear immaterial with the exception of potential purchasing cost reductions, and while there is potential for longer-term revenue synergies driven by incremental regional distribution access for both companies, the upside would be far greater if Cooper were bought by a different tire manufacturer with an established presence in Cooper’s key markets.”
For Apollo Tyres to make such a move on Cooper should come as no surprise; a large well-known and respected tire producer in India, Apollo has spent the last six years spreading its reach around the globe. In 2006, it bought South Africa-based Dunlop Tyres International Ltd., then turned around three years later and bought Netherlands tiremaker Vredestein Tyre for an estimated $300 million.
Since then, Apollo has leveraged Vredestein’s technology to improve its own radial consumer products, and open new markets to its Apollo brand name. Adding Cooper to the fold would not only improve its position in Europe, but give Apollo immediate access to the North American and Chinese markets, where Cooper has a manufacturing footprint.
