Apollo has reentered the race to acquire South Korea’s Kumho Tire and Industries after its sale to a Chinese bidder collapsed over tension in the Korean peninsula impacting deal valuations, said several people aware of the matter.
Chinese tyre giant Qingdao Doublestar signed a definitive agreement with Kumho’s creditors to acquire a 42 percent stake in January but the deal was called off primarily due to the South Korean government’s opposition.
Beijing’s support to Pyongyang made authorities uncomfortable, compounded by the fact that Kumho’s tyres have military and defence applications, said people cited above. “The previous deal was for $830 million and Apollo’s previous bid was at around $775 million. However, with the Chinese out of contention, the latest deal could be in the range of $750-800 million,” said one of the persons.
If successful in its second attempt, Apollo could break into the global top seven with a strong presence in the US and Europe. Apollo and Kumho didn’t respond to emails.
The deal with Doublestar is believed to have collapsed for two reasons. The Chinese firm wanted a 16 percent cut in the acquisition price because of deteriorating earnings.
But more importantly, South Korean officials objected to the transaction because of the strategic nature of Kumho’s business.
“It supplies tyres for fighter planes and military vehicles, and tensions with China, which is a traditional North Korean ally, worked as a catalyst for the collapse of the transaction,” said the person cited above.
Kumho’s creditors took over the company seven years ago. They include Woori Bank, which owns 14.2 percent, Korea Development Bank (13.5 percent ) and KB Kookmn Bank (4.2 percent ). They began the process of selling a 42 percent controlling interest in the company last year. This was being handled by Credit Suisse.
“They are restarting the process. Apollo was among the four final contenders and was pretty serious about the business,” said a source.
The move follows Apollo’s failed $2.5 billion bid to buy Cooper Tire of the US three years ago. ET was the first to report on Apollo’s interest in Kumho in November 2016.
Kumho will give Apollo, which seemed to have given up on acquisitions after the Cooper purchase collapsed due to integration issues, a leading position in the Asian tyre market. Present in the US since 1975, Kumho has built up a presence in the replacement equipment (RE) market there.
Kumho posted revenue of $2.3 billion and net income of $100 million in FY15. It has 5,000 employees, three factories in South Korea and exports to Europe and the US. The company is the world’s 12th largest tyre maker.
As the global tyre industry is going through a tough period, consolidation could help streamlining the business, analysts expect. “Pricing discipline has been below par for the tyre industry of late.
In the India business, while rubber price inflation for Jan-Jun 2017 has been ~25 percent YoY, Apollo was able to put in price hikes of ~6 percent only versus 13-14 percent hike it would have ideally needed,” Credit Suisse said in a note on August 7.
Source: Economic Times