Apollo investors call for Cooper rethink

Shareholders ‘voted with their feet’ following the announcement that Apollo Tyres would acquire Cooper Tire & Rubber for US$2.5 billion, causing share prices to plummet from Rs 92.60 on 12 June – the day the deal was announced – to a low of Rs 54.60 (£0.61) nine days later. Now, several institutional investors are said to be speaking with the Indian tyre maker in the hope it will reconsider the transaction.

Indian financial daily The Economic Times wrote on 10 July that these investors believe Apollo is “over-paying” for synergies that will be difficult to achieve, and they consider the drop in share price – The Economic Times calculates lost share value to be in the vicinity of Rs 15,000,000,000 (£167.2 million) – reflective of the “value-destructive” acquisition deal. The publication did not name the investors said to be speaking with Apollo management and stated it was unable to verify their identity due to alleged “compliance issues”.

A response from Apollo Tyres was forthcoming, however. Chief financial officer Sunam Sarkar stated that Apollo is “in continual engagement with our shareholders at all times and have been proactively reaching out to them post deal announcement to explain the strategic rationale, the financing structure and the benefits to shareholders.” Apollo is said to be aiming for cost synergies of around US$80 to $100 million from acquiring Cooper.

The investors’ objection centres on the high leverage involved in the deal and the potential squeeze on margins should rubber prices once again increase. Apollo’s take on the issue, as reported by The Economic Times, is upbeat; the industry is reaching the “end of the commodity super-cycle, and going forward commodities in general are expected to be moderate.” Sarkar explained that “rubber, specifically, is likely to see a lot of additional supply coming on stream in the next few years, and this is expected to keep prices soft. The leverage taken is split across entities that have the cash-flows to service the debt and no one operating entity is inordinately burdened.”

Apollo also views the acquisition of Cooper as a measure that will reduce its vulnerability to economic and market fluctuations. “One of the great strategic benefits of this transaction is that Apollo’s revenues and profits will be diversified to a whole basket of currencies, and rupee revenues will be only about 20 per cent of the consolidated entity,” shared the company’s CFO. This, Apollo says, will help it avoid a potential slowdown in the Indian market and act as a buffer against rupee weakness.