Early Wednesday morning, American tire company Cooper Tire & Rubber (CTB) announced that it agreed to be acquired by India-based Apollo Tyres for $35 per share ($2.5 billion) in cash. Not only did we peg Cooper’s fair value at $35 per share, the firm also appeared on our list of The 25 Cheapest Stocks on the Market over $10, perhaps marking one of our best stock calls thus far this year.
Apollo paid a 43% premium over the previous day’s closing price, right in line with our above-market fair value estimate. We think Apollo’s offer was fair, and we think the newly-combined entity will be a stronger company. Fears of Cooper’s heavy pension obligations and concerns about intense competition from Chinese competitors have held shares at bay in the mid-$20 range during the past 6 months. However, the firm’s value has always been greater than what the market had assigned it, and we’ve led its price higher with our fair value estimate for some time.
Additionally, we think the Apollo-Cooper alliance will create a stronger entity than Cooper alone. Cooper has a wonderful North American business, as well as strong operations in Europe and China, but the firm is only the 11th largest tire producer on its own. When officially acquired by Apollo, the combined entity will become the 7th largest tire producer in the globe, and we think there could be significant cost-savings. Initial estimates from Apollo peg synergies at $80 million to $120 million in EBITDA annually. On top of cost savings, the deal creates a geographically-diverse company with exposure to various emerging auto markets.
Valuentum’s Take
Considering that Apollo’s offer was fair, we don’t think Cooper shareholders will receive a higher price. We’re watching for further consolidation in the fragmented global tire industry, and Goodyear (GT) comes to mind as a candidate. Still, such a deal may not immediately spark additional consolidation in the auto supply chain, as the group continues to focus more on healing from the pain of the Great Recession rather than on undertaking significant integration risks.
The idea of BRIC (Brazil, Russia, India, and China) auto firms investing in US assets to capture new technologies and/or achieve diversification is not a new one, and the Apollo-Cooper tie-up is but the latest in this trend. We expect firms in BRIC nations to continue to be acquirers of US auto assets (outright or through joint ventures) in the coming years. Our favorite valuation idea in the auto supply chain is Tenneco (click ticker for report: ), though the stock has already converged nicely to our fair value estimate range. We continue to watch the group closely.
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