Cooper-Apollo $2.5 bn deal in limbo but investors cheer valuation dispute

Apollo Tyres’ $2.5 billion dealto acquire Cooper Tire has run into rough weather as itsdemand for price reduction because of problems related to theUS firm’s operations in China and concessions to workers’union has been rejected by the latter.

The differences - largely over control of the Chinese unit and obligations to US workers - became public when Cooper Tire approached the Delaware Chancery Court asking that subsidiaries of Onkar Kanwar’s Apollo Tyres “expeditiously close” the pending merger between the two.

Tthere are primarily two sticking points that have soured the acquisition agreement.

Soon after the deal was announced, workers at Cooper’s venture in China went on a strike protesting against a takeover by the Indian company. While Apollo has till now been saying that it was Copper’s responsibility to find a solution in China, on Monday it blamed the American company for withholding information.

According to a complaint filed by Cooper in a US court,Apollo wanted a price renegotiation “far greater than the $2.50 reduction it had earlier proposed, and at one pointreferencing ‘$8 or $9’ per share”.

The development, however, cheered investors, who were vehemently against the deal.

[caption id=“attachment_1159181” align=“alignleft” width=“380”] As per the original deal announced in June this year, Apollo had agreed to buy Cooper at$35 per share in an all cash transaction.[/caption]

On Monday,Apollo rose 5% to 69.80.The stock continued its upmove and is up another 2.29 percent today at Rs 71.45

As per the originaldeal announced in June this year, Apollo had agreed to buyCooper at$35 per share in an all cash transaction.

Shareholders in the Indian company have fretted that the acquisition – to be financed entirely through debt – will strain its balance sheet. Apollo was willing to pay a 40 percent premium to Cooper’s share price on the last trading day before the deal was announced.

The Indian firm accused Cooper of misrepresenting factsabout its Chinese operations and also of unwillingness to givefinancial concessions to worker’s union, United Steelworkers(USW), but the US firm asserted that the risks were part oftheir deal.

In a statement, Apollo said the company and its financingbanks, Morgan Stanley, Deutsche Bank, Goldman Sachs andStandard Chartered Bank were justified under their mergeragreement to ask Cooper to provide updated financialstatements and guidance “in light of the significant andunanticipated costs that go well beyond those Apollo isobligated to bear under the merger agreement.

“Cooper has acknowledged to Apollo that some pricereduction is warranted. The issue now is by how much."It added: “While Apollo continues to be supportive of

Cooper’s efforts to establish control over its subsidiary’soperations and to assert Cooper’s rights against its JVpartner, Apollo cannot be responsible for Cooper’s failures todo so.”

When contacted, Cooper Tire & Rubber Company VicePresident, Communications & Public Affairs Anne Roman said:“The situations with the USW and the joint venture partner andunion in China are a direct result of the merger agreement,and are risks Apollo assumed under the merger agreement.”

On the price reduction, she said: “Cooper is acting inthe best interests of our shareholders, who overwhelminglyapproved the pending merger with Apollo for $35 per share.Cooper has not agreed that a reduction in share price iswarranted.”

According to Cooper’s complaint in the Court of Chancery,Delaware, “On October 3, Apollo’s representatives againinformed Cooper that Apollo wanted a price renegotiation, thistime suggesting a price reduction far greater than the $2.50 reduction it had earlier proposed, and at one pointreferencing ‘$8 or $9’ per share.”

“…Cooper has breached material representations andcovenants, including with respect to its majority-owned Chinasubsidiary due to the fact that Cooper has no control over thesubsidiary or access to its books and records,” Apollo said.It also refuted Cooper’s complaint filed last week in aUS Court that it was seeking to delay an agreement with theUSW, which represents Cooper employees at facilities inFindlay, Ohio and Texarkana, Arkansas.

“Apollo has indicated to the USW in discussions over thepast two weeks that Apollo is willing to make materialconcessions to the USW, subject to arranging for additionalfinancing or financial concessions. Cooper had been unwillingto provide similar terms to the USW in negotiations over thethree month period before its arbitration setback,” the Indianfirm said.

Elaborating on the issues related to Cooper’s Chinaoperations, Apollo said: “Cooper’s inability to accessthe facilities of its Chinese subsidiary, to determine what

products this subsidiary is producing or to whom thoseproducts are being sold, to track or control how its funds arebeing spent or even to access operating or financialinformation, either physically or remotely, goes well beyondany typical work stoppage.”

The company has asked Cooper to confirm that it hassufficient control over and access to its majority-ownedsubsidiary in China to permit it to deliver current

consolidated financial information and auditors’ comfortletters and that Cooper is in compliance with covenants andrepresentations in the merger agreement.

“To date, Cooper has been unable or unwilling to providethese confirmations,” Apollo said, adding that “Cooper hasmisrepresented its management and control of this asset (ChinaJV) to Apollo and to its own shareholders”.

With respect to China, Roman said that the company hasbeen prevented by the joint venture partner and union accessto certain operational and financial information.“We continue to work toward resolving the issues in Chinathrough communication with the workers, union and the jointventure partner,” she added.

In August, Cooper had said the strike by over 5,000Chinese workers at Cooper Chengshan – a 65:35 joint venturebetween Cooper and China’s Chengshan Group – against the USparent company’s takeover by Apollo Tyres, will not hamper theRs 14,500 crore ($2.5 billion) deal.Despite their differences, both Apollo and Cooperstressed that they looked forward to proceed with thetransaction that would make the combined company the seventh-largest tyre company in the world and will have a strongpresence in high growth markets across four continents.

With inputs from PTI