Alarmed by its share plunging more than 26 per cent after it announced a $2.5-billion (about Rs 14,500 crore) debt-funded acquisition of US tyre maker Cooper Tire, the Apollo Tyres management rushed to assure alarmed investors that the buy will not load the Indian tyremaker with an unmanageable debt burden.
The company said that the bulk of the debt -- $1.9 billion – will be raised on Cooper’s books, against future receivables.
“Apollo India has not taken all of the $2.5-billion loan. It has only taken a loan of $450 million (Rs 2,600 crore),” said Apollo Tyres Vice-Chairman and Managing Director Neeraj Kanwar.
Interest rate
Apollo also clarified that the interest rate on the dollar-denominated bonds is expected to be between 6.75 per cent and 9.5 per cent.
Cooper will issue $1.9 billion worth of bonds with a maturity of around seven to eight years. Eighty-five per cent of the new debt has no annual repayments, only bullet repayment on maturity (typical structure in the US) after seven or eight years, said Sunam Sarkar, Chief Financial Officer, Apollo Tyres.
The Apollo scrip continued its fall on the BSE, however, dropping 5.61 per cent to Rs 64.75 on Friday. In contrast, the Cooper scrip on the NYSE remained flat at $33.80 (as of June 13) compared with $33.82 from the previous close.
“Every new transaction gives opportunities to two companies. We have been able to prove that by acquisition in Africa. The US team of Apollo will integrate very well and synergise and take out the profit pool of what we envisage in future from the Cooper deal,” Kanwar said.
“The bonds will be non-convertible to equity, and Apollo will have a call option after four years,” Sarkar said, adding that Apollo India has a manageable debt load from overseas entity (Africa), which can be met from its cash flows.
“We have carefully planned financing structure to minimise the risk to the business and benefit from the low interest rate environment in the US,” said Kanwar.
He said around 50 per cent of the combined company’s manufacturing will be in low-cost countries. The deal would also increase Apollo’s addressable market size from 500 million to 1,500 million tyres a year.
The company is expected to derive combination benefits of $80-120 million at EBITDA level realised over three years, he said.
Revenue up
Kanwar said apart from becoming the seventh largest tyre manufacture in the world, Apollo’s revenue from the high-margin western markets will also go up to 55 per cent and rest from emerging markets, which will signify good geographic mix.