Questions continue to mount on Apollo-Cooper deal

Investors firm on thumbs-down to $2.5-bn deal, more with union trouble at Cooper

The shareholders of Apollo Tyres seem to prefer that the $2.5-billion takeover deal with US-based Cooper Tire falls through. Since the deal was announced in June, shareholder sentiment has been down, convinced the acquisition will not help but will drain the financial resources.

Though Apollo will have to pay $112.5 million (Rs 690 crore) as break-up fees if it calls off the deal, investors say this is preferable. The agreement said if Cooper pulls the plug on the deal, it will have to pay only $50 mn as break-up fee.

According to media reports, Apollo has even asked Cooper to lower the value of the deal due to labour troubles at the US firm's China and America units.

DEAL IN DOLDRUMS?

• Since the announcement of the deal in June, Apollo shareholders doubted that Cooper Tire acquisition will drain the financial resources of the Indian company
• Apollo Tyres will have to pay $112.5 million, (Rs 690 crore) as break-up fees
• Cooper Tire & Rubber Company has filed a complaint in Delaware Chancery Court asking Apollo Tyres be required to expeditiously close the pending merger between the two companies

On Friday, in a signal of such trouble, Cooper Tire filed a complaint in a Delaware US court, asking Apollo be required to expeditiously close the pending merger in accordance with the terms agreed. Apollo said it was disappointed with Cooper's move and said the litigation had no basis.

"Under the arbitrator's ruling, resolution of those issues is a prerequisite to closing. We are also actively supporting Cooper in reaching a resolution in its financially damaging dispute with its Chinese joint venture partner," went a statement by Apollo on Saturday.

Apollo investors are saying the deal should not see the light of day, considering the rupee's high volatility since the deal announcement, which would put an extra burden. The bankers to Apollo are also cagey about their exposure to the transaction at a time when the rupee is around 63 to a dollar as compared with the 58 a dollar when the deal was announced.

When Apollo announced the deal on June 19, its stock crashed 40 per cent in a day. On a year-to-date basis, the stock is still down by close to 25 per cent. On Friday, Apollo closed at Rs 66.50 a share. Institutional investors sold Apollo shares since they were not convinced that Apollo had the cash flow to service the $450-mn debt to be taken by its Mauritius subsidiary to finance the deal. Investors said the high pension liability of Cooper workers, of $724 mn, could worsen the Indian company's debt burden. Investors also complained Apollos' return on capital employed (RoCE) would fall to 12.5 per cent.

While investors panned Apollo, labour trouble in Cooper's China and America factories came as a boon for them, as these could be a potential deal breaker. On August 1, United Steelworkers and two of its local unions alleged Cooper had violated the successorship provisions of their collective bargaining pact by entering into a merger agreement with Apollo, despite the latter not entering into a deal with these unions. The arbitrator has agreed with the unions. Both Cooper and Apollo officials were supposed to negotiate with the American unions. But in its complaint, Cooper says Apollo is delaying the talks.

Similarly, in China, the production employees at its joint venture, Cooper Chengshan Tire, in Rongcheng went on strike on June 21, demanding termination of the merger.

On August 17, employees returned to work on a limited basis to manufacture only non-Cooper branded products but have taken other disruptive actions, including denying access to certain representatives of the company and withholding certain business and financial information. Apollo is now calling this dispute "financially damaging".