Apollo is planning to make a preferential allotment of 66 lakh equity shares to Continental at around Rs 300 a share, far higher than the ruling market price of Rs 180. It is learnt that Continental is also being given the option to hike stake up to 26 per cent at a later stage.As per the Sebi guidelines on preferential allotment, the price is determined on a basis of the average high and lows of the previous six months on the Bombay Stock Exchange. The scrip's 52-week high and low are Rs 267 and Rs 38.

Apollo Tyres said: "It is premature to comment on the deal. A proposal has been made to Continental and we are together working on it." The deal is, however, subject to several round of clearances including that from the Foreign Investment Promotion Board (FIPB) as well as from financial institutions for the preferential allotment.

Over the last few years, FIs are known to have stalled a large number of preferential allotments proposals. Institutions at present hold 23 per cent in Apollo Tyres, while Kanwar has a 25 per cent stake in the company.

Following the preferential allotment, Kanwar's stake will fall to 22 per cent and that of the institutions to 19.5 per cent on the expanded equity base.

If the deal works out, it does not preclude the possibility of Continental buying out the entire FI stake of 44 per cent in Modi Rubber. The German major has technical alliance with three Indian companies - JK Corp, Apollo and Modi Rubber - and has kept its India strategy a closely-guarded secret.Industry sources feel that Modi Rubber will be a far attractive acquisition for Continental as, with the Modis holding only 13 per cent, management control at the company is now up for grabs.

A strategic equity partnership with Apollo will only be hands-off for Continental, as management control will lie with Kanwar. The German company recently appointed a nominee on the Apollo board. In Apollo's case, funds inflow is essential as it plans to set up a steel-radial tyre unit at an investment of close to Rs 400 crore. Apollo also plans to focus on production of high-end truck radials where Continental's technology willbe crucial.

INSIGHT

Good tidings for shareholders
Continental seeking to pick up 14.99 per cent stake in Apollo Tyres is good news both for the company as well as its shareholders. One reason is the huge difference between the market price of Apollo Tyres shares and the preferential offer price. Continental may seek a controlling stake later.

-- Aaron Chaze