Cooper Tire & Rubber has dropped plans to merge with Apollo Tyres, after months of speculation and industrial action from both sides. Cooper said financing for the transaction is no longer available following a valuation dispute with the Indian competitor. The announcement ends what would have been the biggest ever takeover of a US company by an Indian company in an all-cash offer that ran into serious problems almost as soon as it was announced in June.
However the end of the deal will spark a new phase of legal arguments between the two companies. US-based Cooper "will continue to pursue the legal steps necessary to protect the interests of our company and our stockholders," according to a statement.
Cooper said on June 12 of last year that India-based Apollo planned to buy the tiremaker for USD35 a share in a USD2.5 billion deal. Cooper initiated legal action in October to force completion of the purchase, saying executives at the Indian tire producer had "buyer's remorse" and was looking for a price cut.
Opposition to the deal quickly came to the forefront from both sides. Workers at Cooper’s Chinese joint-venture (JV) partner, Chengshan Group, reacted to the takeover announcement in July by seizing control of Cooper Chengshan Tire (CCT), which provides nearly 25% of Cooper’s revenue. The deal also led to a dispute with the US’s United Steelworkers union, which won an arbitration ruling giving the union in effect a veto over the takeover until its concerns over future jobs and pensions were addressed.
Complicating the deal was Cooper's relationship with its Chinese JV partner Chengshan Group which threatened to dissolve the JV if the merger with Apollo was to be pursued. With Apollo's attempt to lower the transaction price because of the various industrial actions, the matter landed in court even as Cooper sought legal aid in forcing the Indian company to abide by the initially agreed price.
Apollo contended the US company's value has 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.
Though the merger has been terminated, the legal issues caused by the collapse of the deal has the potential to drag on well into 2014. It is not immediately clear if Apollo is liable to pay the breakup fee as Cooper has terminated the agreement.
Brad Hughes, Cooper’s chief financial officer, told investors on a conference call that Cooper believed it would not be liable to pay the USD50m termination fee it was due to pay if it broke off the merger agreement. It would continue to pursue Apollo for the USD112.5m termination fee it was due to pay if it called off the deal and “other possible damages”. The events have prevented Cooper from producing its third-quarter financial results for 2013.
The failed merger has also highlighted Cooper's vulnerability with its Chinese operations, which is likely to affect the company's valuations and sale to any other player going forward. Cooper has the task at hand of restoring normal operations at Cooper Chengshan Tire, where it has lost trust and output as a result of industrial action.
Similarly, labour issues at Cooper’s two US plants have somewhat diminished the company's attractiveness for a potential suitor. Apollo is facing legal fees for the failed transaction, including a potential battle over the USD112.5m termination fee.
