Funding for Apollo Tyres' $2.5 billion bid for US-based Cooper Tire & Rubber Co is in jeopardy unless the deal price is cut to reflect the risk of higher costs stemming from labour issues, sources with direct knowledge of the matter said.
The Indian tyre maker has lined up funding from Deutsche Bank, Goldman Sachs, Morgan Stanley and Standard Chartered Plc. But its lenders have grown increasingly jittery as obstacles to the deal's closure pile up, the sources said, adding that the banks are unlikely to unlock any funding without a concession on price.
Apollo, concerned that labour opposition at Cooper could potentially bump up costs after the acquisition, has asked for a price cut. The deal is also plagued by a dispute between the US tyre maker and its joint venture partner in China.
"Financing would be tricky if the price cut demand is not met," said a source with direct knowledge of the situation. "The credit quality has changed because of these issues."
All the sources declined to be identified due to the sensitivity of the matter.
While debt-funded overseas acquisitions from India are not rare, Apollo's proposal is unusual because the target is much bigger. Cooper's market value is three times Apollo's.
Deutsche Bank, Goldman Sachs, Morgan Stanley and Standard Chartered declined to comment.
Apollo, 43 per cent-owned by the New Delhi-based Kanwar family, has sought a price cut of more than $2.50 per share from the agreed $35 per share, according to Cooper.
Cooper has said a reduction is not warranted and blames Apollo for trying to "find an escape hatch from the deal," which, if completed, would give it access to China and the United States, the world's two biggest automotive markets.
Apollo declined to comment and Cooper did not immediately respond to a request for comment outside US business hours.
The price dispute became public late last week when Cooper filed a lawsuit in a US court asking Apollo to close the deal "expeditiously."
At the heart of the disagreement are labour issues in the United States and in China, where workers at Cooper's majority-owned joint venture have been on strike against the deal for three months. Chengshan Group, Cooper's Chinese partner, has filed a lawsuit seeking to dissolve their joint venture.
Cooper does not disclose revenue from the Chinese joint venture but says it is a "significant" part of its business.
As part of the protest, the workers have locked their US managers out of the factory and have refused to provide any details about its finances or operations.
Separately, a US arbitrator has ruled that Ohio-based Cooper cannot sell two of its US factories until a new collective bargaining agreement is reached between Apollo and members of the plants' union, the United Steelworkers (USW).
A renegotiation with the USW could add costs for Apollo.
"The issue is if Apollo has to take additional financial burden as a result of the US labour settlement or possibly the China JV issue resolution, they must be compensated for that," said another source involved in the deal.
"No one, including probably Cooper, had expected the China JV partner to react the way they have," he said. "They were supposed to deliver Cooper as it was on the day they signed the agreement."
Cooper has said the obstacles are a result of the deal.
The June deal announcement sent Apollo shares plunging by a quarter the next day and triggered stock downgrades. Cooper shareholders cheered the 40 per cent premium and approved the deal last week.
If the deal collapses, Apollo, founded more than four decades ago to sell bicycle steel tubes, may have to a pay $112.50 million break-up fee. Cooper's termination penalty is $50 million under certain conditions.