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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 compa...
+
Pre Deal
Conditions
+
Nature of the Industry
 Tyre Industry is highly raw-material intensive. Raw materials cost
accounts for approx. 63% of ...
+
Cooper
 Together with its affiliates, subsidiaries and joint ventures has
manufacturing facilities on three continents,...
+
Cooper
 Tire safety: Tires are designed and built with great care to
provide thousands of miles of excellent service. F...
+
Apollo
 Apollo Tyres Ltd, world's 17th biggest tyre manufacturer, with
annual consolidated revenues of Rs. 14,000 crore...
+
Apollo
 Products
 Engaged in manufacture of automobile tires, tubes and tire re-
treading compound. The product portfo...
+ Brief Snapshot of Deal
Acquirers Apollo Mauritius and its Subsidiary: Dutch
Holdco and Merger Subsidiary
Seller Cooper
A...
+
Reasons of the Deal
 Market Penetration
 Higher Margins Through Alteration Sales Mix
 Improved Distribution Network a...
+
Mode of Acquisition
 Agreement and Plan of Merger entered into between
Apollo Mauritius, Dutch Holdco, Merger Subsidiar...
+ Financial Consideration
 Apollo signed an agreement to acquire Cooper for a cash
consideration of ~ US$ 2.5 billion
 D...
+
Mode of Funding
 Deal was completely debt-financed
 Standard Chartered sole provider of Deal- US$ 450 M. at the
Apollo...
+
Legal and
Regulatory
Implications
+ Regulatory Roadblocks Employment Approval
 At the time of announcement of the Deal, Cooper had
announced that it shall...
 Lawsuit by Cooper
 In light of the unresolved labor disputes at the Cooper
Chengshan facility and the U.S plants, Apoll...
 Exchange Control Regulations
 The US$ 450 million loan at the Apollo Mauritius level was
guaranteed by Apollo. The prov...
+
Issues
during the
Deal
+
+
+
Problem with Che Hongzhi
 Cooper Tire has a joint venture with the Chengshan Group called
Cooper Chengshan Tire Co, in ...
+
Contd..
 According to Apollo’s due diligence, Che wouldn’t have
been a problem as Roy Armes had guaranteed that they
ha...
+
Problem with the USW
 Cooper Tire and USW don’t have a history of getting along well.
 During the economic downturn of...
+
Contd..
 The union had ten demands, which included coverage of two
other plants (not unionised) and one-time bonuses fo...
+
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...
+
Financials
Mar-2015
(in INR Cr.)
Mar-2014
(in INR Cr.)
Mar-2013
(in INR Cr.)
Sales 13,784 14,391 13,740
Expenses 10,767 ...
+
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...
+
Financials
Dec-2014
(in Cr. $)
Dec-2013
(in Cr. $)
Sales 34.24 34.39
Expenses 28.52 29.23
Profit 5.72 5.16
Net Income 2....
+
Sectoral Conditions Post Deal
 Stock price recovery for both firms post the failure of the deal
 No significant merger...
+
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Apollo-Copper Merger and Acquisition

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A case study on the deal, why the merger failed, what were the issues involved. legalities, financials, structuring etc.

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Apollo-Copper Merger and Acquisition

  1. 1. + By: Nipun Gupta (15) Adarsh Jain (17) Shreyansh Kejriwal (26) Srujana Satyavada (40) Aprajita Singh (49)
  2. 2. + 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.
  3. 3. + Pre Deal Conditions
  4. 4. + 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
  5. 5. + 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
  6. 6. + 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
  7. 7. + Apollo  Apollo Tyres Ltd, world's 17th biggest tyre manufacturer, with annual consolidated revenues of Rs. 14,000 crore (US$2.5 billion) in 2011. It was founded in 1976. Its first plant was commissioned in Perambra, Thrissur, Kerala. The company now has four manufacturing units, one in South Africa, two in Zimbabwe and 1 in Netherlands  It has a network of over 4,000 dealerships in India, of which over 2,500 are exclusive outlets. It gets 62.6% of its revenues from India, 27.9% from Europe and 9.5% from Africa  Exports reach over 70 destinations across the world.
  8. 8. + Apollo  Products  Engaged in manufacture of automobile tires, tubes and tire re- treading compound. The product portfolio of the Company consists of passenger car, SUV, MUV, light truck, truck-bus, agriculture, industrial, bicycle and off highway tires, retreading material and tires, and alloy wheels  HR policy  The Apollo Way describes five simple values i.e. Business Ethics, Care for Society, Empowerment, One family and Communicate openly, as a way of life in the organisation  Cross geography movements, training and development strategies, recruitment practices, reward & recognition and employee motivation strategies are the key focus areas  Structured process for training and development within the organisation at both corporate and local level
  9. 9. + Brief Snapshot of Deal Acquirers Apollo Mauritius and its Subsidiary: Dutch Holdco and Merger Subsidiary Seller Cooper Acquisition Acquisition by means of merger between Cooper and Merger Subsidiary Acquisition Price US$ 35 per share Total Consideration US$ 2.5 billion
  10. 10. + Reasons of the Deal  Market Penetration  Higher Margins Through Alteration Sales Mix  Improved Distribution Network and Economies of Scale  Long Term Growth Opportunities
  11. 11. + 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
  12. 12. + 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$35 per share, a hefty premium of 40% on Cooper’s 30-day volume-weighted average stock price  Deal was unreasonably overpriced given the various market indicia of Cooper and the global economic conditions  Apollo justified the deal as a combination of large market access, a well-established brand and cost-competitive plants
  13. 13. + Mode of Funding  Deal was completely debt-financed  Standard Chartered sole provider of Deal- US$ 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.
  14. 14. + Legal and Regulatory Implications
  15. 15. + 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.
  16. 16.  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.
  17. 17.  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.
  18. 18. + Issues during the Deal
  19. 19. +
  20. 20. +
  21. 21. + 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
  22. 22. + 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
  23. 23. + 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
  24. 24. + 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
  25. 25. + Performance of Apollo and Cooper Post Deal
  26. 26. + Apollo Tyre- Stock Price
  27. 27. + 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.
  28. 28. + Financials Mar-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
  29. 29. + Cooper Tyre- Stock Price
  30. 30. + 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
  31. 31. + Financials Dec-2014 (in Cr. $) Dec-2013 (in Cr. $) Sales 34.24 34.39 Expenses 28.52 29.23 Profit 5.72 5.16 Net Income 2.13 1.11
  32. 32. + 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
  33. 33. +

A case study on the deal, why the merger failed, what were the issues involved. legalities, financials, structuring etc.

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