Aeolus Tyre held on Jun. 28 the 13th meeting of the 6th session of boards and passed agendas related to purchasing and selling assets.
Transaction in Cash
Aeolus Tyres made a sudden announcement at the beginning of June that impacted by a variety of factors, the original Framework Agreement on Significant Asset Restructuring will not be implemented any more and the company plans to work out a new plan.
According to the new plan, Aeolus is to buy 100% share in Double Happiness Tyre Industrial, 100% share in Qingdao Yellow Sea Rubber, and 10% share in Pirelli Industrial - target assets under the original restructuring framework - in cash.
In addition, Aeolus is to sell a 80% stake in Aeolus PCR through cash transaction.
The value of 100% share in Double Happiness Tyre Industrial and 100% share in Qingdao Yellow Sea Rubber is 833,823,000 yuan, that of 80% stake in Aeolus PCR is 497,673,280, and that of 10% stake in Pirelli Industrial is 70,067,516 euros.
Four Potential Risks Exist
The transactions involve in huge amount of capital and there will be risks for Aeolus Tyre.
The company reckons that the risks will be as follow:
1. Risk of higher Debt Asset Ratio
The debt asset ratios of Double Happiness Tyre Industrial and Qingdao Yellow Sea Rubber are both high. Aeolus may need to raise money through debt financing and its debt asset ratio will also increase after the transaction.
2. Risk of Profit Decline
Double Happiness Tyre Industrial and Qingdao Yellow Sea Rubber were both loss-making in 2015 and in the first quarter of 2016. Before the transaction, they both stripped off most of financial debts, which may improve the profitability.
Aeolus said selling assets will reduce loss, buying a 10% stake in Pirelli Industrial will have return on investment, therefore, its profit is unlikely to decline.
But after the transaction, Pirelli will offer licensing and technical assistant services.From 2017, Aeolus needs to pay for the services.
In addition, synergies generated from the transaction will last, but it takes time to integrate, and integration costs money. Furthermore, technical cooperation with Pirelli may led to uncertainty on short-term income.
3. Risk on 10% Stake Investment in Pirelli Industrial
Pirelli Industrial has subsidiaries in a number of countries and regions across the world and they might be affected by risky factors such as political system, financial environment and macroeconomic risk.
Therefore, the return on Aeolus's investment in a 10% stake in Pirelli Industrial mayfluctuate.
4. Risk of Approval
The transaction needs to be approved by the board meeting as well as the Ministry of Commerce, National Development and Reform Commission, and administrator on forex.
Whether the transaction will be approved by all the concerning parties is uncertain.
