Apollo Tyres Climbs After Cooper Tire Drops Merger Plan

Apollo Tyres Ltd. rose to its highest in at least 22 years in Mumbai trading after Cooper Tire & Rubber Co. dropped a $2.5 billion merger plan, easing investor concern the Indian company would take on too much debt.

Shares of Apollo climbed 5.8 percent to 107.20 rupees, the highest close since at least January 1991. The stock has gained 20 percent this year compared with a 9 percent increase in the benchmark S&P BSE Sensex index.

Apollo shares were upgraded to buy by Kotak Securities Ltd. and Ambit Capital Pvt. as the end of the deal alleviates concerns the tire-maker would have added to its debt load. Findlay, Ohio-based Cooper Tire called off the acquisition, saying it would seek damages and that the transaction lacked financing. Apollo, based in Gurgaon near New Delhi, said it’s disappointed and will also sue.

“We believed this acquisition to be overleveraged and aggressive,” Ambit analysts Ashvin Shetty and Ritu Modi wrote in a note today. “Even one bad year of operations could have severely hampered Apollo’s ability to service the interest as well as the principal repayments.”

Ambit upgraded the stock to buy from sell while Kotak raised it to buy from reduce and increased the price estimate to 125 rupees a share from 64 rupees.

The Indian tire-maker planned to fund the purchase through debt, with Morgan Stanley and Deutsche Bank AG hired to manage a $1.88 billion sale of high-yield bonds issued by Cooper, according to Chief Financial Officer Sunam Sarkar. Standard Chartered Plc has underwritten a $450 million bridge loan, Sarkar said in August.

Combined Debt

The Cooper acquisition would have raised the combined company’s debt by almost nine times to $2.8 billion, Ambit’s Shetty and Modi wrote in the report.

Apollo posted a 44 percent increase in net income to 2.2 billion rupees in the three months ended Sept. 30 compared with a year earlier. Total debt was 22.6 billion rupees while it held cash and equivalents of 6.7 billion rupees as of Sept. 30.

Since the June announcement of what would have been the biggest acquisition by an Indian company in North America, the deal faced opposition from workers in China and the U.S., as well as from Cooper’s Chinese partner.

‘Buyer’s Remorse’

The proposed merger had been on the rocks for months. Cooper said in June that Apollo planned to buy the U.S. tiremaker for $35 a share in a $2.5 billion deal, then in October it initiated legal action to force completion of the purchase, saying executives at the Indian tire producer had “buyer’s remorse” and were seeking a price cut. After falling early yesterday, Cooper rose 5.4 percent to close at $24.20.

“We went into this merger in a strong position and as we exit this agreement, Cooper remains a strong company,” Chief Executive Officer Roy Armes said on a conference call. “Despite the challenges we’ve experienced this year, Cooper is expecting to continue to be profitable for the second half of 2013 and to end this year with a strong balance sheet.”

Cooper “will continue to pursue the legal steps necessary to protect the interests of our company and our stockholders,” according to a statement yesterday.

Apollo contended the U.S. company’s value had declined partly because of potentially costly contract talks with the United Steelworkers union and difficulties getting financial data from Cooper’s Chinese partner, Cooper Chengshan (Shandong) Tire Co., which opposed the deal.

‘No Choice’

“Apollo has made exhaustive efforts to find a sensible way forward over the last several months, however, Cooper has been unwilling to work constructively to complete a transaction that would have created value for both companies and their shareholders,” Apollo said yesterday in an e-mailed statement. “Cooper’s actions leave Apollo no choice but to pursue legal remedies for Cooper’s detrimental conduct.”

Cooper is seeking a $112.5 million “reverse termination fee,” Chief Financial Officer Brad Hughes said on the call.

In a Delaware Chancery Court filing this month, Cooper lawyer Stephen Norman said the company “intends to pursue this case as an action for damages.” And in a filing with the U.S. Securities and Exchange Commission yesterday, Cooper said Apollo “will not be relieved or released from liability for damages.”

Anne Roman, a spokeswoman for Cooper, said the company couldn’t immediately comment on future litigation tactics.

Cooper doesn’t believe it owes Apollo a $50 million termination fee for calling off the merger, Hughes said.

“As to the $112.5 million reverse termination fee from Apollo, Cooper is pursuing this and other possible damages,” Hughes said. “Final resolution will be determined by the court.”

The case is Cooper Tire & Rubber Co. v. Apollo (Mauritius) Holdings Pvt, CA8980, Delaware Chancery Court (Wilmington).

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