Apollos Cooper Tire deal heads for crash over valuation dispute

Written by fe Bureau | New Delhi | Updated: Oct 8 2013, 08:51am hrs
Question marks have arisen over the successful completion of the high-profile deal between Indias Apollo Tyres and US-based Cooper Tire and Rubber Co over differences on pricing, emerging out of lawsuits and labour issues at the latters units in the US and China.

Apollo is now looking to pay a lower price per share for Cooper than the earlier $35 per share. In a filing to the US SEC on Monday, Cooper said Apollo representatives had informed it that the Indian firm wanted a price renegotiation. The price reduction suggested was far more than the $2.50 reduction it had earlier proposed, and at one point referencing $8 or $9 per share, Cooper said.

Assuming a cut of $9 to $26/share, the deal size will be lower at $1.7 billion compared with the earlier $2.5 billion. It would also be lower than the current market cap of Cooper Tire of $1.93 billion, given the current share price of $29.51 on the New York Stock Exchange.

Apollo said in a statement on Monday: Cooper has acknowledged to Apollo that some price reduction is warranted. The issue now is by how much. Disputing that it has agreed to a price cut, Cooper Tire informed the US securities regulator that Apollo has requested a cut by as much as $9 per share, from the original $35 payable to Cooper shareholders in the initial agreement.

However, Apollo might yet walk out of the deal if trouble at the China unit a 65:35 JV between Cooper and a local Chinese firm is not resolved. Moreover, a US arbitrator has ruled that the sale of two units cant go through without an agreement with the workers union. The problems in both China and the US came to the fore after Cooper shareholders approved the deal on September 30.

Chances of the deal not going through or being done at a significantly lower price pushed up the Apollo stock, which gained 5% on the BSE to R69.80 on Monday. On June 13, the day after the deal was announced the stock had crashed 25%.

Between June 12 and October 7 this year, the stock is still down by 22.18%.

The tiff between the two sides came into the open after Apollo came down hard on Cooper for filing a complaint in a US court on Friday seeking timely closure of the deal. It called Coopers move a diversionary smokescreen or an unfortunate acknowledgment that Cooper will be unable to meet its obligations necessary to complete the transaction.

We regret and disagree with the characterisations Cooper made in its complaint and look forward to answering in due course. We urge Cooper to stop this time wasting and costly exercise and focus on solving the outstanding issues, an Apollo statement said.

The deal has been plagued with problems ever since it was announced on June 12, with shareholders of Apollo sceptical of the highly-leveraged buyout plan.

Apollo has now questioned the original valuation of the deal over the uncertainty of the future of Coopers Chinese joint venture Chengshan Group where workers are opposing Apollos takeover. Apollo has alleged misrepresentation of the control of the Chinese subsidiary by Cooper, for which the US company has not provided adequate financial, production or sales data.

Yet another problem is the supplementary agreement with Coopers worker union United Steel workers (USW) which has requested a new deal with Apollo with more concessions. A US arbitrator 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 USW.

Cooper had been unwilling to provide similar terms to the USW in negotiations over the three-month period before its arbitration setback. Apollo finds it implausible that Cooper, having failed to resolve these issues for several months, would realistically expect to force Apollo to concede material issues on Coopers accelerated time line, the company said.

Apollo added that it had also asked Cooper to confirm that Cooper has sufficient control over and access to its majority-owned subsidiary in China, while requesting current consolidated financial information and auditors comfort letters to ensure that Cooper is in compliance with covenants and representations in the merger agreement.

Cooper has been unable or unwilling to provide these confirmations. Coopers inability to access the facilities of its Chinese subsidiary, to determine what products this subsidiary is producing or to whom those products are being sold, to track or control how its funds are being spent or even to access operating or financial information, either physically or remotely, goes well beyond any typical work stoppage, said the the statement.

Cooper has misrepresented its management and control of this asset to Apollo and to its own shareholders. While Apollo continues to be supportive of Coopers efforts to establish control over its subsidiarys operations and to assert Coopers rights against its JV partner, Apollo cannot be responsible for Coopers failures to do so, the company further said.

A company official further told FE that the Chinese subsidiary, where Cooper has a 65% stake, had labour problems ever since June-July when the acquisition was first announced. In August, the plant re-started, but since then, it is only making the Chinese brand and not Cooper. They are okay with an acquisition by an American or European company, but not Indian one, he said.

Disputing Apollos contention, Cooper has said that the labour issues were a result of the acquisition and were risks that the Indian company assumed under the agreement. It has maintained that it had satisfied its conditions under the deal after receiving approval from its shareholders last week, and that Apollo was breaching the merger agreement by delaying resolution of the USW issue.

The deal will result in the creation of the worlds seventh-largest tyre company. Apollo plans to raise $2.1 billion of debt backed by the cash flows and assets of Apollos European subsidiary Vredestein Banden BVs as well as Coopers cash flows and assets. The remaining $400 million will come from Indian cash flows.

Skid row

* Apollo calls Coopers US court filing seeking an early deal a diversionary smokescreen for its own problems

* Coopers inability to access financial, sales and production data at Chinese JV leading to uncertainty and delays

* New problems in agreement with Coopers US workers union, which wants revisions

* In June, Apollo was to pay $35/share; new proposal cuts payment to Cooper shareholders to as low as $26/share

* Apollos revised lower band offer of $1.7 billion for Cooper is lower than the latters current market cap of $1.93 billion