apollo-copper merger and acquisition
TRANSCRIPT
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By: Nipun Gupta (15)Adarsh Jain (17)Shreyansh Kejriwal (26)Srujana Satyavada (40)Aprajita Singh (49)
+Tyre Industry Origin of Indian Tyre Industry dates back to 1926 when Dunlop
Rubber Limited set up the first tyre company in West Bengal. MRF followed suit in 1946. Since then, the Indian tyre industry
has grown rapidly. Indian Tyre Industry now provides direct and indirect
employment to nearly 1 million persons, including dealers, retraders, growers of Natural Rubber, employment in raw material sector etc.
While the tyre industry is largely dominated by the organized sector, the unorganized sector is predominant with respect to bicycle tyres.
The total number of tyre dealers, geographically spread all over the country is over 5,000 - serviced through over 500 depots of tyre companies.
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Pre DealConditions
+Nature of the Industry Tyre Industry is highly raw-material intensive. Raw materials
cost accounts for approx. 63% of tyre industry turnover and 72% of production cost.
The industry is a major consumer of the domestic rubber market. Natural rubber constitutes 80% while synthetic rubber constitutes only 20% of the material content in Indian tyres
62% of total Natural Rubber consumption is by the Tyre Sector, balance by rubber based non-tyre industries. Interestingly, world-wide, the proportion of natural to synthetic rubber in tyres is 30:70
Total weight of raw-materials consumed by tyre industry – 15.50 Lakh M.T.
Total Cost of Raw Materials consumed by tyre industry – Rs.16,000 Crores
+Cooper
Together with its affiliates, subsidiaries and joint ventures has manufacturing facilities on three continents, sales and distribution networks around the world and products that meet and exceed the demands of the world's most dynamic markets
Primary focus is passenger car and light vehicle replacement tires in North America
An emerging OEM presence The 12th largest global tire manufacturer The fifth largest tire manufacturer in the U.S. Market share in the U.S. is 12 percent in the light
vehicle replacement market
+Cooper Tire safety: Tires are designed and built with great care
to provide thousands of miles of excellent service. For maximum benefit they must be maintained properly
HR policy: The company is guided by a strong set of values that we call "The Cooper Way." The Cooper Way is their mantra-their way of being and behaving, it represents the values they hold, and more important, the values they live by each day Help Each other Succeed Have Engaged Communication Be Agile Provide World Class Customer Service Be Results Focused Do the Right Thing
+Apollo Apollo Tyres Ltd, world's 17th biggest tyre
manufacturer, with annual consolidated revenues of Rs. 14,000 crore (US$2.5 billion) in 2011. It was founded in 1976. Its first plant was commissioned in Perambra, Thrissur, Kerala. The company now has four manufacturing units, one in South Africa, two in Zimbabwe and 1 in Netherlands
It has a network of over 4,000 dealerships in India, of which over 2,500 are exclusive outlets. It gets 62.6% of its revenues from India, 27.9% from Europe and 9.5% from Africa
Exports reach over 70 destinations across the world.
+ Apollo Products Engaged in manufacture of automobile tires, tubes and tire re-
treading compound. The product portfolio of the Company consists of passenger car, SUV, MUV, light truck, truck-bus, agriculture, industrial, bicycle and off highway tires, retreading material and tires, and alloy wheels
HR policy The Apollo Way describes five simple values i.e. Business Ethics,
Care for Society, Empowerment, One family and Communicate openly, as a way of life in the organisation
Cross geography movements, training and development strategies, recruitment practices, reward & recognition and employee motivation strategies are the key focus areas
Structured process for training and development within the organisation at both corporate and local level
+ Brief Snapshot of DealAcquirers Apollo Mauritius and its Subsidiary:
Dutch Holdco and Merger Subsidiary
Seller Cooper
Acquisition Acquisition by means of merger between Cooper and Merger Subsidiary
Acquisition Price
US$ 35 per share
Total Consideration
US$ 2.5 billion
+Reasons of the Deal Market Penetration Higher Margins Through Alteration Sales Mix Improved Distribution Network and Economies of
Scale Long Term Growth Opportunities
+Mode of Acquisition Agreement and Plan of Merger entered into
between Apollo Mauritius, Dutch Holdco, Merger Subsidiary and Cooper for the merger of the Merger Subsidiary with and into Cooper
As a result of the Merger, the separate corporate existence of the Merger Subsidiary shall cease Cooper will continue as the surviving corporation post- Merger, as an indirect, wholly owned subsidiary of Apollo
Each share of Cooper’s common stock issued and outstanding immediately prior to the effective time of the Merger was to be converted into the right to receive US$ 35 in cash, without interest
+Financial Consideration Apollo signed an agreement to acquire Cooper for a
cash consideration of ~ US$ 2.5 billion Deal would create the world’s seventh ranked tyre
company Synergy - Management expects potential savings of
$80‐120mn which would accrue over a period of three years
Apollo agreed to acquire Cooper for ~US$35 per share, a hefty premium of 40% on Cooper’s 30-day volume-weighted average stock price
Deal was unreasonably overpriced given the various market indicia of Cooper and the global economic conditions
Apollo justified the deal as a combination of large market access, a well-established brand and cost-competitive plants
+ Mode of Funding Deal was completely debt-financed Standard Chartered sole provider of Deal- US$ 450 M. at the
Apollo Mauritius level to be serviced from the cash flows of Apollo
US$ 450 M. to be transferred via equity to Dutch Holdco. Morgan Stanley, Deutsche Bank, Standard Chartered Bank and
Goldman Sachs Bank USA to provide committed funding of US$ 2.375 B. to the Merged Subsidiary consisted of a US$ 1.875 B bridge facility and a US$ 500 M revolving credit facility
The bridge loan to be refinanced by the issue of high-yield junk bonds to the tune of US$ 1.9 billion with tenure of 7 to 8 years and coupon in the range of 6.75% to 9.5%
Bullet repayment on the bonds of US$ 1.9 billion would be at the end of the tenure of the bonds.
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Legal and Regulatory Implication
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+ Regulatory Roadblocks Employment Approval
At the time of announcement of the Deal, Cooper had announced that it shall honor the terms of collective bargaining agreements negotiated with its labor unions after the Merger.
In September, a U.S arbitrator ruled against Cooper’s sale of two of its factories to Apollo until a collective bargaining agreement is reached between Apollo and members of the plants’ unions.
Dispute arose as a result of the United Steelworkers (“USW”) arguing that the terms of the agreement, covering 2,500 USW members will be violated without Apollo entering into new collective bargaining agreement with the workers of the above mentioned plants.
Cooper had stated that it will be working with Apollo and USW to resolve worker’s concerns.
Lawsuit by Cooper In light of the unresolved labor disputes at the Cooper
Chengshan facility and the U.S plants, Apollo sought a reduction in the Merger Consideration of US$ 35 per share, saying it may not be feasible for Apollo and its lenders to accept the Deal on the initially agreed pricing terms.
This prompted Cooper to file a suit against the Acquirers in the Delaware Chancery Court for expeditious closing of the Deal.
Apollo sought for the dismissal of the suit, contending that Cooper has been unable for a matter of months to access basic financial material in relation to the joint venture about a significant portion of its business and that Cooper was unable to deliver all the assets that are part of the Deal.
Exchange Control Regulations The US$ 450 million loan at the Apollo Mauritius level
was guaranteed by Apollo. The provisions of the Master Circular on Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad (“ODI Regulations”) permit an Indian company to undertake, in all its JVs and WOS put together, a total financial commitment which shall not exceed 400% of the net worth of the Indian company as on the date of its last audited balance sheet, under the automatic route.
Current structure of Apollo says that the company has made investments in a number of wholly owned subsidiaries in Mauritius, South Africa, Netherlands, etc.
For the purpose of calculation of the 400% investment limit, the aggregate investment of Apollo in all these entities must have been taken into account.
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Issues during
the Deal
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+Problem with Che Hongzhi
Cooper Tire has a joint venture with the Chengshan Group called Cooper Chengshan Tire Co, in which Cooper is the majority shareholder with a stake of 65 percent.
Che felt that the deal wasn’t fair to him and wanted that he should be compensated but Apollo tyres ignored him.
Moreover the bigger problem was that Apollo wasn’t even aware that Che had bid for the same company and Cooper didn’t even consider the proposal and didn’t inform Apollo
After this, Che made the bid for Cooper at $38 3 more than Apollo’s bid
+Contd.. According to Apollo’s due diligence, Che wouldn’t
have been a problem as Roy Armes had guaranteed that they had a great working relationship with Che.
The union and Che pointed that the deal was highly leveraged and doesn’t guarantee meeting the needs of the customers and workers
Standard Chartered bank also asked Apollo to reconsider the finances of the deal.
CCT went on strike With China facility out-of-bounds the financing of
the deal was slowing down
+Problem with the USW Cooper Tire and USW don’t have a history of getting along
well.
During the economic downturn of 2008, when fuel prices shot up and US car sales came to a screeching halt, Cooper found itself in the middle of a crisis
As a part of due diligence, in early 2013, it was possible that post the merger announcement, the union might raise a red flag
+Contd.. The union had ten demands, which included coverage of
two other plants (not unionised) and one-time bonuses for all union members among several other conditions. By Apollo’s estimate, the additional cost of meeting those demands was about $130-140 million.
The Apollo met with USW regarding a compensation but couldn’t reach the settlement
The USW went to arbitration court and court ruled in favour of USW and asked them to include the compensation paid to them if merger went through
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Performance of Apollo and Cooper Post Deal
+Apollo Tyre- Stock Price
+Expansion
Apollo spent Rs.3,800 crore in setting up a factory in Hungary, the largest outside India for an Indian tyre company.
It also spend Rs.2,000 crore on expanding the capacity of the company’s factory in Chennai
This investment, Kanwar said, will further Apollo’s cause in becoming a $6 billion company by 2020.
+FinancialsMar-2015(in INR Cr.)
Mar-2014(in INR Cr.)
Mar-2013(in INR Cr.)
Sales 13,784 14,391 13,740
Expenses 10,767 11,567 11,382
Profit 1,930 1,875 1,456
Profit After tax
977 1,005 613
EPS (in Rs)
19.18 19.94 12.18
+ Cooper Tyre- Stock Price
+Cooper-Che Partnership And Buyback of Shares
The firm sold its 65 percent stake in CCT in November 2014 for about $262 million
Cooper Tire's board of directors also issued a share repurchase authorization of up to $200 million through December 2016.
It recently completed a $200 million accelerated share repurchase program in August 2014 where it bought about 6.4 million shares at an average price of $31.49 per share
+Financials
Dec-2014(in Cr. $)
Dec-2013(in Cr. $)
Sales 34.24 34.39Expenses 28.52 29.23Profit 5.72 5.16Net Income
2.13 1.11
+Sectoral Conditions Post Deal Stock price recovery for both firms post the failure of
the deal No significant mergers & acquisitions except of
expansion by Apollo and offloading CCT stake by Cooper
Leadership rankings of most companies remained more or less the same
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