Apollo Tyres seeks to cut $2.5B Cooper deal value

Cooper Tire & Rubber Co has filed a complaint in Delaware Chancery Court, US against Apollo Tyres' arm to close its pending $2.5 billion deal of the American company according to the terms of the definitive merger agreement, the company has disclosed.

The pending merger was announced on June 12 after the boards of directors of both companies unanimously approved the sale of Cooper to a wholly owned subsidiary of Apollo for $35 per share, a premium of over 40 per cent to its price before the acquisition announcement, valuing the deal at $2.5 billion. Separately, Cooper’s shareholders approved the deal last week.

Cooper’s complaint has alleged that Apollo is seeking to delay an agreement with the United Steelworkers (USW). The USW represents Cooper employees at facilities in Findlay, Ohio and Texarkana, Arkansas. An arbitrator ruled on September 13 that, as result of the pending merger, Cooper and Apollo must enter into new agreements with the union prior to closing.

By delaying resolution with the USW, Apollo is breaching the merger agreement, according to Cooper.

“Cooper has an obligation to protect the rights of our stockholders, who voted overwhelmingly in favour of the merger. With their approval, we have met our conditions for closing. The complaint filed today is a necessary step in the process to assure that the terms of the merger agreement are met as required and that we do everything possible to get the transaction closed promptly,” said Cooper chairman, CEO and President Roy Armes.

“The strategic rationale for the merger with Apollo is solid, and we look forward to finalising the transaction, which will create the seventh-largest tire company in the world,” he added.

Cooper said in a separate disclosure with US secuities regulator SEC that Apollo has sought to pare down the deal value as it may have to bear significant and unanticipated costs that were well beyond those it was obligated to bear under the initial merger agreement. Apollo has reportedly claimed that Cooper has acknowledged that some price reduction is warranted, which is disputed by the American tyre maker.

It added Apollo is looking to cut the deal value from $35 per share to $32.5 a share and is relooking at the deal as it has had a ‘buyer’s remorse’ after the deal sunk its share price back in India.

Back of the envelope calculations show Apollo had indicated bringing down the deal value to $2.32 billion.

However, Cooper said last Thursday Apollo’s representatives informed that it wants a further price renegotiation and at one point referring to price cut by $8 or $9 per share. This would mean Apollo is looking to cut the deal value to $1.86 billion or by a quarter of the initial proposal.

Cooper is facing a daunting challenge in China as its local partner has threatened to dissolve the business arrangement under their JV Cooper Chengshan (Shandong) Tire Company, Ltd. (CCT) in light of the proposed takeover by Apollo Tyres. Workers at CCT have also gone on strike and has since then partially resumed work.

However, Cooper said this cannot be taken as material adverse effect under the deal as it is a result of the merger agreement itself. It added that the adverse ruling in the pending settlement involving USW has been used as a pretext by Apollo to delay the transaction.

“Apollo’s intentional failure to reach an agreement with the USW is nothing more than a bad-faith pretext for avoiding consummation of the merger,” according to Cooper.

It added that its rethink over the deal has to do with the adverse development in China and its own buyers’ remorse rather than the pending agreement with USW.

“Apollo knows that, if the CCT disruption continues past mid-November, then Cooper may not be able to provide Apollo’s lenders with certain financial statements for the third quarter of 2013, which is a condition to the lenders’ obligation to fund the financing required for closing the merger. If those financial statements cannot be provided in mid-November, then the lenders may refuse to fund. Thus, in purposely obstructing an agreement with the USW, Apollo is attempting to delay the closing long enough so that it can shift the risk of resolving the CCT disruption away from itself (as contemplated by the merger agreement), and foist that risk entirely on Cooper. And, in the meantime, Apollo is seeking to use that perceived leverage to extract a price decrease from Cooper, or to otherwise escape what it now views as a bad bargain,” according to SEC disclosure by the American firm.

The proposed deal has a reverse break-up fee of $112.5 million which could be a potential liability for Apollo Tyres as a penalty to be paid to Cooper if it backs out of the deal.

Apollo Tyres’ scrip ended the day at Rs 69.8 a share, up almost 5 per cent on the BSE in a flat Mumbai market on Monday. Investors have been worried over the large deal which could pile up debt on the books of Apollo Tyres and an uncertainty over the proposed transaction is seen as positive development for the stock.

(Edited by Joby Puthuparampil Johnson)

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