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Published: Monday, 12/30/2013 - Updated: 10 months ago

FAILED MERGER

Cooper Tire ends deal with Apollo

Both sides pursuing lawsuits over fallout

BY JON CHAVEZ
BLADE BUSINESS WRITER

FINDLAY — Cooper Tire & Rubber Co. on Monday terminated its merger agreement with India’s Apollo Tyres Ltd., ending the tentative $2.5 billion deal a day before it would have expired anyway.

In canceling the merger prior to its midnight Dec. 31 expiration, Findlay-based Cooper Tire said it did so because it became apparent that the deal was never going to close.

Also, it became clear that bank financing needed by Apollo to complete the transaction had been withdrawn, Cooper said.

“This was, of course, a difficult decision for us to make [because] a business combination with Cooper and Apollo is compelling for many reasons,” Roy Armes said Monday in a live Webcast to investors and Wall Street analysts. Mr. Armes is Cooper Tire’s chairman, president, and chief executive officer.

However, it was “a reality that the agreement both companies signed on June 12 will not be consummated by Apollo,” Mr. Armes added.

Under the all-cash deal, Apollo was to pay Cooper shareholders $35 per share — nearly a 45 percent premium over where Cooper’s shares were as of the close of the markets on the day before the deal was announced.

Shares soared above $34 shortly after the deal was announced, but fell significantly in the past three months as it became clear that the deal was in trouble.

In heavy trading Monday, Cooper’s shares rose more than 5 percent, closing at $24.20 a share, or up $1.24.

With the deal now dead, both companies appear headed for litigation in Delaware Chancery Court, which will decide who may be at fault for the failed merger.

Brad Hughes, Cooper vice president and chief financial officer, said, “We believe Apollo has breached the merger agreement, and given this, we will continue to pursue the appropriate legal steps to protect the interests of our company and our stockholders.”

The nation’s fourth-largest tire maker said it intends to pursue damages, including a $112.5 million reverse termination fee from Apollo for failing to complete the deal.

Meanwhile Apollo said that “Cooper’s actions leave Apollo no choice but to pursue legal remedies for Cooper’s detrimental conduct.”

The Indian tire company is expected to seek a $50 million merger termination fee from Cooper and possibly other damages. Cooper officials said they do not believe the company owes the termination fee.

Both companies have been in and out of court in Delaware since October, when Cooper accused Apollo of dragging its feet on the deal.

Both firms said then that they were still committed to getting the merger done, but as the Dec. 31 expiration date loomed, it seemed clear that the deal would not be consummated for a variety of reasons, including issues with Cooper’s joint venture in China, and labor negotiations with the United Steelworkers union.

“Some days I thought it was getting closer and some days I thought they were getting further apart,” said Rod Nelson, president of Steelworkers Local 207L in Findlay, which represents Cooper Tire workers.

Efraim Levy, an analyst with Standard & Poor’s, said the big question now is “how does it play out legally, because I’m assuming that Cooper knew what it was doing in terminating the deal [Monday].”

As a financial matter, “I don’t think the Apollo transaction was make-or-break for Cooper and I still don’t,” Mr. Levy said. “They had been making progress in improving their business even before this transaction.”

Still, the analyst said he anticipated additional costs with ending the merger, resolving its China problems, and ongoing litigation in the first quarter of 2014. As a result, he lowered his 2014 target share price for Cooper Tire to $26 a share from a previous $29.

Mr. Hughes, the company’s chief financial officer, said that with the merger terminated, “Cooper can move forward, unencumbered by the agreement, to focus on our business.”

Mr. Nelson said that will be good news for the company’s 1,050 hourly workers in Findlay.

“We just want to focus on building tires. We don’t want to be distracted by who is going to own us,” the union leader said. “We want our corporate leadership to focus on tires sales and not the sale of the business.”

In a statement, Apollo said it was disappointed that Cooper had “prematurely attempted to terminate” the agreement.

“While Cooper’s lack of control over its largest subsidiary and inability to meet its legal and contractual financial reporting obligations has considerably complicated the situation, Apollo has made exhaustive effort 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 …,” the statement said.

The subsidiary complicating the situation is Cooper Chengshan Tire, or CCT, the Findlay company’s seven-year-old joint venture with Chengshan Group, located in northeastern China.

After the deal with Apollo was announced in June, management and workers at CCT protested by going on strike and cutting production. Management there refused to provide Cooper with its financial data, making it impossible for Cooper to provide Apollo with the updated financial information it needed to secure financing for the deal.

Cooper still has not received financial data from CCT, and the Findlay company has yet to file its third-quarter financial report, which was due Nov. 14.

With the merger now dead, Mr. Armes said Cooper’s first priority is resolving the situation with Chengshan Tire. “Cooper is working independently to restore normal operations at CCT,” Mr. Armes said.

In October, Cooper went to court in Delaware, claiming that Apollo was delaying the deal and asking that it be compelled to complete the merger. Apollo countered, arguing that Cooper was not doing enough to help it finalize the deal and stating, according to Cooper, that the purchase price of the deal should be reduced — by as much as $9 a share — because of the unexpected problems it had encountered, including the Chengshan situation and negotiations with the United Steelworkers union.

An arbitrator had ruled Apollo had to abide by a clause requiring it to accept Cooper’s labor unions but the Indian company had yet to negotiate a contract with the Steelworkers union.

Mr. Armes said it had been suggested that the litigation could have been avoided if Cooper had reduced its price from $35 a share.

But on Monday he said Cooper never received a proposal from Apollo to reduce the share price that either included committed financing or did not contain unreasonable risks for Cooper and its stockholders.

Had the deal not soured, Cooper and Apollo would have become the seventh-largest tire company in the world with revenues of $6.6 billion based on 2012 estimates.

“Both of them have sound management. It would have been interesting to see it go through,” said Greg Smith, publisher of industry trade publication Modern Tire Dealer.

“I would not be surprised if we were to see both companies talking with others within the industry again in the future,” said Mr. Smith.

Mr. Levy, the analyst, said while Apollo may choose another merger partner, Cooper will be less desirable until it resolves the issue with Chengshan.

“I think that what happened in China will scare away any potential suitors. They have to fix that beforehand because if it continues, it will make potential suitors take a hard second look at them,” Mr. Levy said.

Contact Jon Chavez at: jchavez@theblade.com or 419-724-6128.



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