Vivek Prakash/ReutersAn Apollo Tyres workshop in Mumbai, India.
The proposed $2.5 billion acquisition of Cooper Tire and Rubber by Apollo Tyres speaks to the ambitions of an Indian company seeking to become the seventh-biggest tire maker in the world.
It would be the biggest takeover of a United States company by one based in India since the global financial crisis, according to Thomson Reuters data. And it is a deal intended to help the 41-year-old company compete better in a global automotive supply chain dominated by giants.
At home, however, the deal has run into something of a large road bump.
Shares of Apollo plummeted 25.45 percent in trading in Mumbai on Thursday, their first day of trading after the transaction was announced in the United States on Wednesday. The plunge came amid investor concerns about the amount of debt the company was taking on to finance the deal.
The all-cash acquisition is being financed entirely by new debt. Apollo has committed debt financing for $450 million from Standard Chartered, and nearly $2.4 billion in committed debt financing from Morgan Stanley, Deutsche Bank, Goldman Sachs and Standard Chartered.
Analysts in India were scathing about the leveraged deal.
Noting that Apollo’s ratio of net debt to equity would go from negative 0.5 times equity to 4.8 times, analysts at IIFL Capital gave the stock a “sell” recommendation. “We highlight that a weakening balance sheet is a key concern,” they wrote.
Analysts at Emkay wrote: “We see this as a risky acquisition as the management would have little room for error given the high leverage, very little synergy benefits and the poor demand environment.”
Analysts at Ambit said they found the proposed acquisition of Cooper “aggressive” even while commending Apollo as “one of the best-managed tire companies in India.”
Still, they hastened to add that “over 80 percent of great companies in India self-destruct through a combination of overconfidence and unbridled expansion.”
Article source: http://dealbook.nytimes.com/2013/06/13/shares-of-indian-buyer-tumble-over-cooper-deal/?partner=rss&emc=rss