No risk to Cooper deal; completion by Oct: Apollo Tyres

Apollo Tyres' shares plunged more than 36 percent in two weeks on the back of debt concerns by investors over the company's acquisition of US-based Cooper Tire and Rubber Company on June 12. Unlike the market, Neeraj Kanwar of Apollo tyres saw no roadblocks for the deal and expected its completion by October 2013.

The acquisition, valued USD 2.5 billion, will be completely funded through borrowings. Breaking down the debt repayment plan, Kanwar told CNBC-TV18 that the first part of the debt (USD 2.1 billion) will be raised via issuing bonds in the US bond market worth USD 1.9 billion. The rest USD 200 million will be an asset-based lending. The rest of USD 450 million will be reduced to around USD 400-410 million from the sales of Dunlop's operations in South Africa and the remaining amount will be paid down eventually, he said. On the interest payment of USD 180 million on the total debt, Kanwar said that the EBITDA margins of the Cooper and Vredestein will be used to cover the same. Below is the edited transcript of his interview to CNBC-TV18. Also read: ANALYSIS: Market overreacting to Apollo Tyres' Cooper buy
 
Q: There has been a sharp fall in your stock ever since you announced the Cooper Tires acquisition. Any relook on whether you want to do that deal of not? Is there a timeline in place for the deal to get done completely? A: I do not see any risk for the deal to happen. We have taken up until October that the deal will close. The entire amount of financing has been underwritten. We have got support of both the Indian and the American supervisory boards. There is a merger definitive agreement which both the boards have agreed to. So I do not see there is any risk on closing this deal. Q: Your stock has collapsed post the announcement of the deal. What do you have to say to these investor concerns that you may have bitten off more than you can chew? A: The size in this does not matter. You are looking at global span. You are integrating the two operations. We have done that in the past. This is not a new merger or acquisition deal for us. We have done Dunlop and we have done Europe in the heart of Western Europe. So, this is not such a big deal how investors are seeing it as. There is a clear strategic and financing rationale to this combined entity. I see it being in the tire industry for the next 20 years. It is truly a game changer to the industry. Yes, in the beginning there was a panic and the first price came down to 25-30 percent on the first day of trade. We had visioned it to go down by 15 percent and things will settle down. Across India, in cross-border deals, in the initial phase, the share does take a beating. Eventually, the investor realises. I have confidence in my team, my shareholders that the shares will come back up. This is a game changer and it is going to make the profit margins healthier, the company stronger. It is going to make the Apollo Tyres, Vredestein and Cooper brands much stronger. _PAGEBREAK_ Q: What worries your investors and analysts is the kind of debt that you will take on. People are not terribly convinced that you will be able to even make your payment schedules? A: Break this into two tranches. Firstly, it is a clear leverage buyout transaction, which is a standard transaction in the US. So for the USD 2.5 billion debt, one part of the debt (USD 2.1 billion) has been taken on the international company, which are both Cooper and Vredestein. That is broken up into USD 1.9 billion of a bond that will be taken in the US bond market. This has an interest cost between 6.75 and 9.5 percent. The EBITDA margin for the two entities is close to USD 675 million. The interest payment on the loan total is around USD 180 million. So the interest is covered nearly 3.8 times. The cash flows will look after the USD 1.9 billion. The USD 200 million is an asset base revolver. This is clearly the basis on the current assets of the company. So that is not an issue. The second tranche is the USD 450 million which is a dollar debt. This has been taken on the Mauritius holding company backed by the cash flows of Apollo India. The debt of USD 450 million is obviously an okay leveraged debt for Apollo India to take on; given the healthy cash flow we have seen. In March 2013, the company's finished EBITDAs were close to Rs 900 crore. So you can see even here the interest is covered 2-3 times of EBITDA. So the interest in India and the international operations is covered. On payment, the USD 1.9 billion is no yearly payment. That is a bullet payment after 7-8 years which we will have intentions to pay in the next 7-8 years which we can after 4 years. That is the agreement with the banks. If not we can always refinance that amount. So I do not see where the concern is. On the USD 450 million, part of the USD 450 million will be reduced because of the sale on the Dunlop operations in South Africa. So part of those proceedings will come to bring down the debt. It might be between USD 400 million and USD 410 million. Over time, that will also get pared down. Part of USD 450 million, USD 200 million will get syndicated to a term loan, which will be for a period of 4-5 years. So this is the overall plan. Q: There is some difference of opinion on what exactly your debt equity levels come to post this deal. What is the consolidated debt equity figure? When can you return to the pre-deal debt equity ratios that you had? A: The net debt EBITDA multiple has to be seen. The calculation of 1.9 is correct. On the net debt, yes for the next 2 years we will go closer to 5 times multiple but will come down as we go along. Seeing the healthy cash flows of both operations of Apollo India and Apollo International; the multiples will start falling down to pre-transaction post 2-3 years. So you will see it coming down to 4.5 to 4 times and eventually to 3 times multiple, which is healthy. We do go up but then we also have a very clear cash flow repayment program to bring this down.