Cooper Tire-Apollo merger looks shaky

Thomas Wells

Daily Journal

The merger between Cooper Tire & Rubber Co. and its India-based suitor appears to be unraveling, as both sides exchanged barbs over the weekend about who is at fault at the delay in completing the deal.

While both boards of directors unanimously approved the merger in June and Cooper’s shareholders overwhelming voted for it last week, a completion of the merger is anything but guaranteed.

A big issue to resolve is Cooper’s joint venture plant in China, Cooper Chengshan Tire Co. While  Findlay, Ohio-based Cooper has a 65 percent stake in the facility, the 5,000 workers there have refused to make Cooper-branded tires and have blocked Cooper management from accessing their offices and critical information. The Chinese don’t think the Apollo deal is good for them, citing cultural differences and other issues.

Cooper’s labor problems also extend back home in the U.S., where the United Steelworkers union has caused another headache.

The union, which represents Cooper’s plants in Findlay, and Texarkana, Ark., got a favorable ruling from an arbitrator last month in which the plants’ sale was prohibited until Apollo had reached a bargaining agreement with the union.

On Friday, Cooper filed a complaint in Delaware Chancery Court, essentially asking that Apollo quit dragging its feet in those talks. Cooper said Apollo wasn’t moving quickly enough in dealing with the USW.

In response to Cooper’s complaint on Friday, Apollo late Sunday said it was having to put up with “significant and unanticipated costs” with the merger.

Both companies have valued the deal to be worth $2.5 billion, and the combination would create the world’s seventh-largest tire maker. Apollo had offered Cooper shareholders $35 in cash per share.

But Apollo on Sunday said Cooper “has acknowledged to Apollo that some price reduction is warranted. The issue now is by how much.”

Cooper denies it has agreed to any such thing.

“Cooper has not agreed that a reduction in share price is  warranted. ... The situations with the USW and the joint venture partner and union in China are a direct result of the merger agreement, and are risks Apollo assumed under the merger agreement. We believe the situation with the USW can be resolved in a timely manner and ask that Apollo proceed expeditiously toward resolution with the USW, working with Cooper.”

Apollo, though, said Cooper shoulders the blame over its troubles in China.

“Cooper has misrepresented its management and control of this asset to Apollo and to its own shareholders.”

If the merger is not completed by the end of the year, it can be terminated without penalty. For Apollo, a breakup fee could cost it as much as $112.5 million.

Many analysts think the merger is all but finished.

Chris DeMuth Jr., a portfolio manager with Rangeley Capital, said Apollo is working to back out of its offer to Cooper and sabotage the merger altogether.

“Cooper would like to hold them to their commitment, but they hold only a piece of paper that goes stale at year end and is signed by a shell corp located off of the coast of Africa,” DeMuth said. “Without a clear-out from the merger agreement, Apollo is trying to sabotage the deal so that they can let the banks out of their financing or so that they can get to the walk date.

“Meanwhile, Cooper has the problem that Cooper shareholders are probably unwilling to support a recut deal. What is the good news for Cooper? They are up under 5 percent since before the deal compared with Goodyear, which is up by over 50 percent. That probably overstates their respective changes in fortune by a substantial amount. Cooper can now focus on patching things up with CCT and the USW and getting back to work. They could buy back shares with the money that they might receive in the reverse breakup fee as well as financing that they could secure for (that) purpose.”

Cooper Tire closed Monday on the New York Stock Exchange at $25.72, down $3.79, or nearly 13 percent. Cooper shares traded at a 52-week high of $34.79 after the merger was announced in June.

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