What caused this debacle was the news that Apollo Tyres would acquire US-based Cooper Tire & Rubber for a whopping Rs 14,500 crore.
On paper, the news is very exciting because the deal will help Apollo Tyres become the seventh largest tyre maker in the world with a combined sales of USD 6.6 billion as of 2012. Apollo will also get the muscle to gain access to newer markets, at a time when demand in India has been sluggish on the back of the slowdown in auto sales.
However, the reality is that because the deal is entirely funded by debt of USD 2.5 billion debt, Apollo’s debt:equity ratio will go haywire and shoot to 3.8 as against the present 1.7. Servicing this debt will be a huge problem for Apollo Tyres.
Analysts at Goldman Sachs, Kotak Institutional Equities, Ambit Capital and Quant Capital were quick to label the acquisition as “aggressive” and downgraded the stock to sell.
Meanwhile poor shareholders of Apollo Tyres were left nursing their wounds as they saw 1/4th of their hard-earned money invested in Apollo Tyres evaporate into thin air.