Apollo Cooper takeover on the rocks

Apollo Tyres’ planned takeover of Cooper Tire appears to be in serious jeopardy as the latest court proceedings reveal the depth mistrust between the two companies. Cooper’s suggestion that Apollo has “buyer’s remorse” and is using the industrial dispute at Cooper Chengshan as a way of sabotaging the deal is the clearest example of this yet. The question of whether or not Apollo is putting everything it can into closing the deal is at the centre of the case. Apollo says it is doing everything it can despite the Chengshan and USW issues. Cooper says these are being used as delay tactics.

The Financial Times (FT) reports that Francis Crispino of Greater Pacific Capital had emailed Apollo suggesting that certain problems around the detail – such as the labour dispute in China and the USW union negotiations in the US could be used to kick the deal into the long grass until the US$2.5 billion deal lapses at the end of the year.

This came out in the second day of the case (6 November 2013) and followed the revelation that the Chengshan Group, which owns 35 per cent of Cooper’s main Chinese operation – Cooper Chengshan Tire, had discussed a possible counterbid for the company. These details better contextualise the reasons why Chengshan workers may have entered into such a bitter dispute. According the FT, workers at Cooper Chengshan have “prevented nearly all Cooper executives from entering the company premises and have stopped sharing financial information about the company’s performance” since the deal with Apollo was announced.

The case sees Cooper aim to for Apollo to close the deal, which was agreed in June. According to the Wall Street Journal, Apollo wants a reduction to the $35-a-share deal price, to compensate for what it says are disputes with workers over the deal in the US and China alongside disappointing recent Cooper financial results. Furthermore with Apollo needing to borrow roughly 90 per cent ($2.3 billion) of the $2.5 billion deal, the Indian company has highlighted the difficulties associated with marketing this debt in such circumstances.

What scenarios are we looking at?

What seems clear is that as each day goes by there is little hope that the original US$35-a-share agreement will go ahead, especially with several sources and Apollo managing director Neeraj Kanwar himself, suggesting that the credit climate is turning cold. Analysts such as BreakingViews characterised the remaining three options like this (notwithstanding a court ruling forcing a particular position):

1. Breakdown – If the deal crashes Cooper shares are expected to return to pre-bid prices around $24.50. However, the Chinese dispute could even push this down to $23 depending on how Cooper’s stake in Chengshan is valued.
2. Compromise – Negotiation could lead to an alternative to either complete fulfilment of the original bid or total breakdown. For example adjusting the value of Cooper due to the Chinese dispute and adding the same 40 per cent premium it offered based on this. According to Breakingviews this would mean shareholders would receive around $32 a share, roughly 10 per cent less than the original bid.
3. Reduce premium – A second negotiated scenario may see Cooper reduce the premium it offers to something like 20 per cent. In this case shareholders would be offered just $28 a share.

With Cooper shares trading at less than $25 dollars at the time of going to press, this could be interpreted as investor believing there is no chance of the deal will ahead at the original price, a roughly 60 per cent probability of failure and just a 20 per cent possibility of either renegotiation situation proving correct.

When you consider the fact that Apollo put the cost of renegotiating new labour contracts with the USW at “up to $125 million”, which works out at about $2 a Cooper share, this situation could be interpreted as an indication that Apollo is most interested in following one of the negotiated options rather than the set on the torpedoing of deal altogether. However as the New York Times pointed out, the longer the dispute drags on, the Cooper’s value is damaged, which also makes it more likely that Cooper will want to renegotiate. The only other alternative is to the continuing the whole saga is to find another bidder.