Blame game

Apollo-Cooper fight puts bankers in the spotlight

The legal battle over Cooper Tire & Rubber has put banks in the spotlight. Emails shown in court reveal lenders to Apollo Tyres have been looking for a way out of the debt-financed takeover of its US rival and pressured the Indian company to renegotiate the $2.3 billion deal. Banks appear keen to limit their exposure, while avoiding blame for pulling the plug.

Apollo already had little room for error when the Cooper tie-up was announced in June. The debt it took on would leave the enlarged company's Ebitda margin around 300 basis points higher than its interest payments, Kotak Securities calculated, based on the original offer. That's a thin cushion in the volatile tyre-making business. Apollo's shares slumped.

Problems at Cooper's operations in the US and China that emerged after the deal was announced make it even riskier. An arbitrator ruled in September that Apollo must first reach an agreement with Cooper's United Steelworkers (USW) union before the deal could proceed. Even more seriously, the minority partner at Cooper's China operation demanded $400 million from Apollo to be bought out of the joint venture. Giving in to both those demands would undermine Apollo's plans to pay off its debt.

The merger agreement doesn't allow Apollo to use the China problems as a reason to back out of the deal. Behind the scenes, however, lenders discussed whether Apollo could wriggle off the hook or negotiate a lower price. In an email dated September 14, Morgan Stanley managing director William Dotson raised the possibility of Apollo dragging out negotiations with the unions and letting the deal expire. On September 30 Sumit Dayal, Standard Chartered's global head of strategic finance encouraged Apollo to seek a price reduction and warned against closing the deal until the China problem was solved. Morgan Stanley, Standard Chartered and Apollo all declined to comment.

Though the banks are not the subject of the court battle, they could still be dragged into the fight. A Delaware court next month will rule whether Apollo must close the deal on its agreed terms. Banks will then have to decide whether to honour their original commitment to their client or try to protect themselves from what is now a much riskier loan. Whatever the outcome, the courtroom revelations don't show them in a good light.