Apollo, Cooper in last-ditch bid to salvage deal

Apollo Tyres Ltd and Cooper Tire and Rubber Co. are making a last-ditch effort to salvage their $2.5-billion acquisition deal and are likely to form joint teams to address the concerns surrounding it, two persons familiar with the developments said on condition of anonymity.

add_main_imageApollo’s acquisition of the US firm seemed in doubt over public disagreements between the two firms. Apollo sought to lower the price of $35 a share following resistance to the deal by Cooper’s workers in the US and China, and Cooper responded by filing a case in a US court accusing Apollo of trying to back out of the agreement.

“There seems to be some misunderstanding and both firms will address the issues jointly,” one of the persons said. “However, China remains a major bone of contention, considering the size of the market and the structure of the ownership there.”NextMAds

Although both the companies are trying to work out a solution, if the problems in China are not solved, it would cast a shadow over the deal, this person said.

Both Cooper and Apollo declined to comment on the latest development.

Apollo, India’s second largest tyre maker by market value, sought to buy Cooper mainly to gain access to the US and Chinese auto markets. The transaction is one of the largest in India’s automotive industry, bigger than Tata Motors Ltd’s purchase of UK-based JaguarLand Rover from Ford Motor Co. for $2.3 billion in 2008.

But Gurgaon-based Apollo began facing problems with the United Steelworkers’ union in the US, which represents employees at two Cooper plants, and workers at Cooper’s Chinese joint venture objecting to the deal. Apollo had asked Cooper to push the deal-closure deadline to 4 October.

Cooper filed a complaint in a US court last week claiming Apollo had initially sought a discount of $2.5 per share on the initial offer ($35) and later $8-9 per share, and accused the Indian company of delaying the conclusion of the deal. On China problems, Cooper said Apollo was facing “buyer’s remorse” and wanted to back off from the deal.

“There will be joint teams to address the issues,” said the second person familiar with the developments. “I can’t be commenting about what happens in the future.” sixthMAds

A Cooper official said on condition of anonymity that the US firm will seek a break-up fee if Apollo fails to complete the deal by the year end. If Cooper claims the break-up fee, Apollo may have to pay $112 million and if Cooper walks away, it may have to pay $50 million to the Indian firm.

In a statement on Tuesday, Cooper said it was acting in the best interests of its shareholders, who, it said, overwhelmingly approved the pending merger with Apollo for $35 per share. Cooper has not agreed that a reduction in the offer price is warranted.

The share price of Cooper rose 41% on 12 June on the New York Stock Exchange, the day after the merger deal was announced. On Monday, after the disagreement became public, the stock fell 13%.

“The situations with the United Steelworkers (USW) and the joint venture partner and union in China are a direct result of the merger agreement, and are risks Apollo assumed under the merger agreement,” the US firm said in the statement. “The situation with the USW can be resolved in a timely manner and we ask that Apollo proceed expeditiously towards resolution with the USW, working with Cooper.”

Cooper also said its Chinese joint venture partner and union prevented it from accessing certain operational and financial information, but added that it was working to see the deal through.

“We continue to work towards resolving the issues in China through communication with the workers, union and the joint venture partner. Cooper looks forward to closing this compelling transaction with Apollo, which will provide multiple benefits for both organizations, their employees, customers and communities,” Cooper said.

Apollo’s efforts earlier to reach out to USW and workers in China on its own had not gone down well with Cooper.

An arbitration ruling on 13 September with respect to the signing of a fresh agreement by Apollo with USW had said, “The sensible next step would be for Cooper, on its own behalf and as the authorized representative for (the Dutch holding company of Apollo), to reopen its negotiations with the USW in order to achieve the agreement.”

Cooper, however, said Apollo had insisted on its own representatives taking the lead in the negotiations and had been keeping it out of the loop. But the second person quoted above said, “it is impossible for Apollo to reach out to USW or Chinese workers without consent from Cooper”.

Last week, Cooper claimed Apollo had said it could not feasibly market debt financing for the merger unless the USW issue was resolved. It also said Apollo was delaying the marketing of the bonds and, hence, the fund-raising process for financing the deal. According to the merger agreement, the deal can be financed through a “bridge-to-bond facility”, which means that if Apollo is unable to raise funds from bonds, it can finance the acquisition through loans to bridge the funding gap.

Apollo has to raise at least $1.875 billion through bonds and $500 million through collateral-backed credit facility. “Even if the notes (bonds) could not successfully be marketed, the bridge must be funded in any event,” Cooper said in its complaint to the US court on Friday.

Deepak Ladha, executive director at Ladderup Finance Ltd, a financial advisory, suggested that the depreciation of the rupee may have made the overall size of the deal expensive for the Gurgaon-based firm.

“When the deal was struck, the rupee was trading around 58 (to a dollar). Even then, the deal was being called over-leveraged. Now that rupee is close to 62, the deal has become extremely expensive and there is a likelihood that Apollo may be facing issues in raising funds as they have turned expensive,” Ladha said.