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June 12, 2013 8:30 pm
India’s Apollo Tyre has made its goal clear: to be a global leader in tyres. Its $2.5bn deal to acquire the US’s Cooper Tire shows how aggressive it is prepared to be to get there. The combined group will be the seventh-largest global tyremaker (Cooper is currently 11th, Apollo 15th). The boldness lies in the smaller Apollo buying Cooper for a formidable 40 per cent premium, and paying in cash.
Apollo’s enterprise value is just above $1bn. The deal will send its ratio of debt to cash flow to nearly three. The price multiple of five times cash flow is standard for a tyre company, but capitalised synergies of $500m equate to just a third of the premium. The deal is pricey – but then big strategic moves are rarely cheap.
With two-thirds of Apollo’s revenue in India (and a quarter in Europe) it makes sense to look to the US. India’s GDP growth in 2012 was just 5 per cent, its lowest in several years, and foreign investors worry about the low pace of economic reforms needed to make India more competitive.
This week the rupee/dollar exchange rate has hit an all-time low of 59 (in early 2008, 40 rupees would get a dollar). Currency traders are moving away from emerging markets as interest rates rise in the developed world, and India is plagued by a large current account deficit stemming from gold and oil imports.
With the Cooper and Smithfield transactions, the past two weeks have seen the largest purchases to date by Indian and Chinese companies of American assets. China, whose economy is larger and more dynamic than India’s, has inked 16 deals greater than $500m in the US in a decade; India trails that count by only one, according to Dealogic. The less contentious relationship between India and the US should help the former keep up with the more prosperous China in closing US deals.
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