‘No comment’ replies drive further Cooper acquisition speculation
It’s now more than a day since reports of a potential Apollo Tyres acquisition of Cooper Tire & Rubber hit the headlines, and Tire Review observes there has been far more speculation than denial since then – which it says brings into question just what is happening. And while silence may be golden, the lack of comment – or even flat denial – from either party has led to all manner of speculation.
The US industry publication recaps the news since yesterday: India’s Economic Times 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 US$600 million to $800 million.”
Earlier this month, Apollo said it would raise some US$150 million via “placement of shares to qualified institutional buyers.” The Economic Times said “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, with three major tyre brands and a footprint that touches the US, Europe, South Africa, India and China. According to Tire Review data, in 2011 Cooper posted sales of $3.9 billion, placing it ninth on the global list, while Apollo had sales of $2.2 billion, putting it in 16th spot. Tyres & Accessories’ own information positions Cooper Tire in 11th place on the global ranking and Apollo in the 15th spot.
Responding to requests by Tire Review and other media yesterday, Cooper issued a simple one-sentence statement: “Cooper Tire has a strict policy of not commenting on rumours and speculation in the market.” On the other side of the world, Apollo was equally tight lipped, telling Tyres & Accessories that it “would not comment on market speculation.”
Buoyed by the rumours, Cooper shares, which had been trading between $12.21 and $23.40 over the last 52 weeks, closed yesterday at $19.78, up six per cent from the previous day.
But some tyre industry analysts did offer their thoughts. KeyBanc Capital Markets in the US 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 (Cooper) 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) tyre 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, opines Tire Review; a large well-known and respected tyre 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 tyre maker 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.