Private equity major KKR & Co has agreed to sell its controlling stake in off-highway tyre maker Alliance Tire Group (ATG) to Japan’s Yokohama Rubber, marking its second exit from an India-related portfolio firm.
Yokohama will buy ATG for $1.18 billion (Rs 7,880 crore) to expand its commercial tyres business, it said on Friday.
ATG makes tyres for agricultural, industrial, construction and forestry machinery. It sells radial and bias tyres in 120 countries, with a focus on the North American and European markets. Headquartered in Amsterdam, it has two plants in India and one in Israel.
Created in November 2006, ATG had sales of $529 million and operating profit of $95 million last year. The deal values the company a little over two times sales and 12.4 times operating profit of the last financial year.
KKR had acquired a controlling stake in ATG from another global PE firm Warburg Pincus in April 2013. This was structured as a leveraged buyout, one of the few to date involving an Indian company. It was also the second buyout deal by KKR, coming seven years after it bought Flextronics Software (since renamed Aricent) for $900 million.
The value of the KKR-Warburg Pincus deal was not disclosed but people familiar with the transaction had told VCCircle at the time that it involved an equity valuation of $522 million and that KKR had also taken $125 million on the balance sheet of Alliance Tire. This gave ATG an enterprise valuation of nearly $650 million. KKR had picked up around 90 per cent stake in ATG, which meant a payout of $470 million back then. The deal was its biggest transaction since it set up its India office in 2009.
KKR had raised debt and mezzanine capital to finance the ATG deal, led by US-based Crescent Mezzanine that provides funding to buyout firms for leveraged acquisitions. The deal also saw participation from Ivy High Income Fund, which invests in fixed-income securities.
Since ATG’s holding company was based in the Netherlands, it allowed KKR to pursue a leveraged buyout. Leveraged buyouts, where an acquirer borrows money often with assets of the target firm as a collateral, is virtually banned in India. The RBI had mooted a proposal to loosen screws to create liquidity for stressed assets, but PE firms are yet to seal any such deals. Leveraged buyouts by PE firms are common in the west.
The deal had resulted in a blockbuster exit for Warburg Pincus, which first invested to fund the $45 million acquisition of Israel’s Alliance Tire Company Ltd in 2007. Warburg later teamed up with Yogesh Mahansaria, former CEO of Balkrishna Tyres, and his father Ashok Mahansaria to form ATG.
Warburg Pincus is believed to have increased its total investment to about $100 million in ATG later. The PE firm had pocketed around $400 million for its 77 per cent stake then, which gave it around 4x returns on its six-year-old investment.
Yogesh Mahansaria had continued to own a stake in the company and partnered with KKR in growing the business.
The World Bank’s private-sector arm, International Finance Corporation, was another shareholder in ATG as it invested $10 million in equity and $50 million in debt to fund the tyre maker’s $160 million capex in 2012. It is not clear if it remained a shareholder.
In 2009, ATG acquired the assets of the US-based GPX International Tire Corporation for a reported $38.3 million, which gave it Galaxy and Primex brands besides the existing Alliance brand.
For Yokohama, the deal will expand its product portfolio as it does not make or sell tyres for agricultural or forestry machinery. It is betting on higher demand for such tyres as farmers rely on more machinery to improve efficiency.
Indeed, the Japanese firm has been in the midst of its medium-term management plan that seeks to push commercial tyres as the new core of its business strategy.
KKR finally hits gold
With an estimated 90 per cent stake in ATG, KKR will likely pocket $1.06 billion from the deal, more than doubling its initial investment value.
This deal marks the second India-related exit activity for KKR. Last year, it had exited telecom tower firm Bharti Infratel with modest returns. While it made 70 per cent returns in rupee terms on its seven-year-old bet on Bharti Infratel, in US dollar terms it managed just 10 per cent profit, largely due to the sharp depreciation of the Indian currency.
PE firms need to show good returns to their own investors to raise fresh funds. Lack of big profitable exits from India has been one of the main grouse of limited partners as investors in PE funds.
KKR’s stake sale in ATG is the single-biggest PE exit transaction from an India-related company in the last decade, according to VCCEdge, the data-research platform of VCCircle. It beats the $1-billion stake sale in NYSE-listed BPO firm Genpact by General Atlantic and Oak Hill Capital Partners. That was a secondary deal where Bain Capital and GIC had teamed up to buy the stake.
Prior to that, Warburg Pincus had sold its stake in Bharti Airtel for over $1.6 billion in tranches.