Apollo’s $2.5 Billion Cooper Offer in Jeopardy: Corporate India

Apollo Tyres Ltd.’s $2.5 billion offer to buy Cooper Tire & Rubber Co. is nearing collapse after labor disputes in the U.S. and China led the Indian suitor to seek a lower price.

Apollo is seeking to reduce its $35-a-share offer to as low as $26 and is playing delay tactics to attempt to back out of the agreement, which expires Dec. 31, according to an Oct. 4 complaint from Cooper to the Delaware Chancery Court. Gurgaon, India-based Apollo didn’t respond to specific queries seeking comment on Cooper’s allegations, though it said in an Oct. 6 statement on the lawsuit that “the issue now is by how much” the offer should be lowered.

Since the June announcement of what would have been India’s biggest acquisition of a North American company, the deal’s faced opposition from workers in China and the U.S., as well as from Cooper’s Chinese partner. Talks between Apollo and Cooper have now soured, with each company publicly saying the other is failing to honor the purchase agreement.

“This deal didn’t seem like it was very well planned,” said Manish Sonthalia, a fund manager at Motilal Oswal Asset Management Co. in Mumbai. “Unless there is resolution from both sides, the deal is as good as dead.”

Morgan Stanley, Deutsche Bank AG and Greater Pacific Capital advised Apollo on the acquisition agreement, while Bank of America Corp.’s Merrill Lynch advised Cooper.

Yesterday, Cooper asked a Delaware judge to fast-track its dispute and to hold a trial by Nov. 7.

Deal Complications

Apollo shares rose 1.2 percent to 70.55 rupees, the highest close since Sept. 20. Cooper fell 13 percent yesterday, the most in more than two years, to $25.72. That’s a contrast to when the deal was announced on June 12, when Cooper soared 41 percent and Apollo shares plunged a record 25 percent the following day.

Cooper, which has a Chinese venture with Chengshan Group Co., soon saw the deal hit complications.

Within weeks of the deal announcement, the venture’s workers, backed by Chengshan, went on strike in opposition of the Apollo purchase. The Findlay, Ohio-based tiremaker said in the lawsuit that workers at the Chinese factory -- Chengshan says it’s Cooper’s biggest -- are still refusing to make Cooper branded tires and denying the company access to financial information at the plant.

Separately in August, the United Steelworkers -- representing Cooper’s workers in Findlay and Texarkana, Arkansas -- filed grievances over Cooper’s sale. In September, the arbitrator barred Cooper from selling its Texarkana and Findlay plants until the union reaches a new collective bargaining agreement with Apollo.

Penalty Fee

Apollo has since drawn out negotiations with the U.S. union to prevent the Cooper purchase from completing, according to Cooper’s complaint, a copy of which was filed with the Securities and Exchange Commission. Apollo, which agreed to a $112.5 million reverse break-up fee, can walk away from the deal should it not be completed by Dec. 31, according to Cooper.

On Sept. 27, Apollo’s vice chairman indicated to Cooper’s chief executive officer that the deal would not close at $35 a share, according to Cooper. Apollo subsequently asked Cooper to accept a $2.50-a-share reduction in the offer, followed by an Oct. 3 proposal indicating Apollo would seek a cut of as much as $8 to $9 a share, according to Cooper’s complaint. Cooper said it rejected Apollo’s proposal.

On Oct. 4, the day Apollo’s purchase was originally scheduled for completion, Cooper filed a complaint with the Delaware court to expedite the completion of the deal, according to Cooper.

‘Inexplicable’ Complaint

Apollo responded to the complaint by issuing an Oct. 6 statement saying Cooper was being unreasonable in rushing the deal and failing to provide assurances about its China venture.

“Cooper’s decision to file a complaint at this time is inexplicable and can only be seen as a diversionary smokescreen or an unfortunate acknowledgment that Cooper will be unable to meet its obligations necessary to complete the transaction,” Apollo said. On China, “Cooper has misrepresented its management and control of this asset to Apollo and to its own shareholders.”

Apollo said Cooper acknowledged the need to cut the original offer -- a claim Cooper denied. Cooper said it’s working to resolve its issues in China and that Apollo should expedite a resolution with the U.S. union workers.

“These developments highlight the increasing discord between the two parties,” Ashvin Shetty and Ritu Modi, analysts at Ambit Capital Pvt. in Mumbai, wrote in an Oct. 7 note. “We continue to have a negative view on the acquisition.”

Shetty said that the deal falling apart would be positive for Apollo. The deal was over-leveraged and one bad year of operations could seriously hinder the ability of the combined entity to pay the interest and principal for the debt it was taking on, Shetty wrote.

Before it's here, it's on the Bloomberg Terminal.