Apollo-Cooper deal may skid on valuation issue

Indian firm wants discount on agreed price, citing labour issues

Gurgaon-based Apollo Tyres on Monday said it was looking to renegotiate the value of its $2.5-billion deal to acquire US-based Cooper Tire & Rubber Co due to persisting labour issues at the latter’s Chinese and American facilities.

In a complaint filed last week in a Delaware court, Cooper Tire had claimed Apollo had initially sought a discount of $2.5 per share on the initial offer and later of $8-9 a share. According to the original deal, Apollo was to pay $2.5 billion to buy out Cooper Tires at $35 a share. Depending on the various discounts demanded by the Indian company, the deal size would come down to $2.32 billion (at $ 32.5 a share) and $1.86 billion (at $26 a share). In simple terms, it means Apollo Tyres has asked for a reduction between seven per cent and 25 per cent on the original deal price.

“Cooper has acknowledged that some price reduction is warranted. The issue now is, how much. On top of the USW (United Steel Workers) issue, Cooper has breached material representations and covenants, including with respect to its majority-owned China subsidiary due to the fact that Cooper has no control over the subsidiary or access to its books and records,” Apollo Tyres said in a statement.

SLIPPERY TERRAIN

A timeline of Apollo-Cooper deal

• Jun 12: Apollo Tyres announces $2.5-bn takeover of Cooper Tire
• Jun 13: Apollo shares fall 39% on BSE
• Jun 21: Cooper’s Chinese workers strike work in protest against the deal
• Sep 5: Apollo asks Cooper to push the deal-closing deadline of October 4
• Sep 13: US arbitration rules in favour of United Steel Workers of Ohio and Arkansas units, which had demanded the Indian company reach an agreement with them before closing the deal; merger stayed
• Sep 27: Apollo seeks re-negotiation of deal; seeks discount of $2.5 a share
• Sep 26: Apollo fails to reach agreement with unions
• Oct 3: Apollo wants a discount of $8-9 on the offer price of $35 a share
• Oct 4: Closure of the deal fails as talks with USW unsuccessful
• Oct 5: Cooper moves court, wants Apollo to expedite transaction

In its complaint, however, Cooper had said Apollo was delaying settling issues with USW, which had sought that new agreements be drawn between it and the Indian company before the deal was concluded. It had added that Apollo’s delaying tactic was for lowering the price of the deal. It also said Apollo was facing “buyer’s remorse” and was concerned about the protests at Cooper’s joint-venture facility in China, Cooper Chengshan Tire Co (CTC), and had been looking for pretexts to back out of the deal.

On the Indian company’s attempts, twice, to re-work the deal’s valuation, Cooper said Apollo Vice-Chairman & MD Neeraj Kanwar had in a telephonic conversation on September 27 proposed reducing the purchase value to $32.5 a share from $35 determined earlier. Again, on October 3, the purchase value was sought to be cut by $8-9 per share as a pre-condition for closing the deal.

Apollo had agreed to pay a 40 per cent premium to Cooper shares’ 30-day weighted average price in June but its own shares collapsed on BSE, as investors feared Apollo was overpaying for the US firm. On talks the deal might fall through as it had moved court, Cooper’s stock fell six per cent on Friday.

Apollo, countering Cooper’s allegations, said it had indicated to USW over the past two weeks its willingness to make material concessions, subject to arranging for additional financing or financial concessions. It said it had hired advisors to assess the financial cost of requests made by USW, which represents employees Cooper’s plants in Ohio and Arkansas.

“Apollo finds it implausible that Cooper, having failed to resolve the issues for several months, would realistically expect to force Apollo to concede material issues on Cooper’s accelerated timeline”, the company said in a statement.

Apollo also said Cooper had failed to provide assurances that it could provide financial statements for its China joint-venture unit, where workers have been striking for over three months to protest against the proposed acquisition. The Chinese facility has also filed a lawsuit seeking dissolution of the business pact, saying the sale to Apollo would undermine the venture’s operations.

The unit is key to the proposed takeover, as Apollo is aiming to gain footprint in China, the largest market for commercial vehicles.

Apollo said: “Cooper’s 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…Cooper has misrepresented its management and control of this asset to Apollo and to its own shareholders.”

“Apollo and its financing banks — Morgan Stanley, Deutsche Bank, Goldman Sachs and Standard Chartered Bank — are justified under the merger agreement to request that Cooper provide updated financial statements and guidance in light of the significant and unanticipated costs that go well beyond those Apollo is obligated to bear under the merger agreement,” it added.

Cooper, however, said in its complaint, as part of the due diligence process, Apollo representatives had met Chengshan Group’s chairman on May 15. They conveyed to Cooper they understood Chengshan Group wanted to be compensated in some way if a merger transaction between Cooper and Apollo took place. Apollo knew no such compensation was included in the merger pact..