Apollo Tyres Limited (BOM:500877) shares plunged 25 percent on Thursday amid rising debt concerns over a $2.5 billion deal to buy Cooper Tire & Rubber Company (NYSE:CTB).

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The deal announced yesterday will help the Indian firm to gain access in the U.S., which is the world’s second-largest auto market after  China.

Apollo Tyres Shares

Apollo Tyres Limited (BOM:500877) shares ended today down 25.45 percent at 68.55 rupees.

The $2.5 billion deal will make Apollo Tyres Limited (BOM:500877) the seventh largest tire maker in the world. Apollo Tyres Limited (BOM:500877) and Cooper Tire & Rubber Company (NYSE:CTB) have combined sales worth USD 6.6 billion in 2012.

The deal will also help Apollo Tyres Limited (BOM:500877) gain access to newer markets such as China and the United States, with India experiencing a slowdown in auto sales.

Apollo Tyres Limited (BOM:500877) will fund the purchase by raising funds through 7-8 year foreign currency paper, as there is barely any cash in the company’s books.

According to a Reuters report, the new debt will raise the post-acquisition leverage for the combined entity to 3.8 times net debt / EBITDA (earnings before interest, tax, depreciation and amortization) from 1.4 times now.

As per the terms of the deal, the shareholders of Cooper Tire & Rubber Company (NYSE:CTB) will get $35 a share in cash. The per share price represents a 42.5 percent premium over the Tuesday’s closing price, and 40 percent premium over the tire company’s 30-day volume-weighted average price.

Cooper Tire & Rubber Company (NYSE:CTB) is twice the size of Apollo Tyres Limited (BOM:500877) in terms of turnover and 5.5 times in terms of profit.

Huge Debt Burden

Cooper Tire & Rubber Company (NYSE:CTB), in its analyst presentation, says the company is experiencing tough times, facing an onslaught of cheap imports from Asia, particularly in its lower variety of tires. The U.S. based company predicted sluggish demand in 2013 besides warning of continuing and new challenges.

Given this background, acquiring Cooper Tire & Rubber Company (NYSE:CTB) with a 40 percent premium will burden Apollo Tyres Limited (BOM:500877) shareholders, who can expect to carry the huge debt burden for the rest of their lives. However Cooper Tire & Rubber Company (NYSE:CTB) would also a service a significant part of the additional debt that Apollo Tyres Limited (BOM:500877) would take to finance the deal.

Apollo Tyres is funding the Cooper Tire & Rubber Company (NYSE:CTB) acquisition via USD 2.5 billion debt, out of which USD 2.1 billion will be taken at the holding company level, which will include Cooper Tire & Rubber Company (NYSE:CTB) and Apollo Tyres Limited (BOM:500877)’s European operations (Vredestein). USD 450 million debt will be taken in Apollo Tyres Limited (BOM:500877)’s Mauritius subsidiary and would be serviced by the Indian operations.