COOPER TIRE ENDS MERGER AGREEMENT WITH APOLLO TYRES

c.2013 New York Times News Service

What would have been the largest Indian acquisition of a U.S. company has been derailed by problems with a joint venture in China and a dispute with a labor union in the United States.

The Cooper Tire and Rubber Co. said Monday that it had terminated its merger agreement with Apollo Tyres, the Indian company that had agreed to buy it for $2.5 billion before several setbacks landed the deal in court.

The agreement was set to expire Tuesday, and Apollo, which wanted to get out of the original deal, appears to have stalled long enough to escape what it came to view as a flawed transaction. In a statement, Apollo, which is based in Gurgaon, India, said that it “has made exhaustive efforts to find a sensible way forward over the last several months; however, Cooper has been unwilling to work constructively to complete a transaction that would have created value for both companies and their shareholders.”

“Cooper’s actions,” it added, “leave Apollo no choice but to pursue legal remedies for Cooper’s detrimental conduct.”

The companies will now return to court, where they will fight over what, if any, breakup fees are owed.

For Cooper, which is based in Findlay, Ohio, terminating the merger agreement amounts to an admission of defeat in its efforts to force the deal to close even after issues arose at its plant in China and with its labor union in the United States.

The original deal was struck in June, when Apollo agreed to buy Cooper in a bid to create a larger international competitor in the market for automobile tires.

But the price of $35 a share that Apollo agreed to pay immediately struck analysts and investors as too high. Cooper’s margins were viewed as already being near their peaks, and competition in the United States was likely to pick up because of increased competition from Chinese manufacturers.

“It was a relatively full price being paid for Apollo to gain some North American exposure,” said Bret D. Jordan, an analyst with BB&T Capital Markets. “They were paying at peak margin prices.”

Apollo shares slumped on news of the deal, even as Indian executives pledged to proceed.

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Yet despite the high price being paid to Cooper, problems immediately arose at the company.

The United Steelworkers union filed grievances with Cooper, contending that it was contractually allowed to approve any change in ownership and using that as an opportunity to try to renegotiate its contract. Apollo said it would negotiate a new collective bargaining agreement but argued that as a result it should be able to pay less for Cooper. Cooper said Apollo knew about the steelworkers’ contract and that no price adjustment was warranted.

The issues with the steelworkers, however, were small compared with the problems Cooper suddenly faced with its joint venture in China.

Cooper Chengshan Tire, the joint venture, was originally 51 percent owned by Cooper, which teamed up with a local businessman. In 2010, Chengshan’s Chinese partner sold Cooper a significant part of its stake for just $18 million. The stake that might have been worth much more based on the size of Apollo’s offer.

But after the deal with Apollo was announced, management and workers at Cooper’s joint venture stopped working with the company and cut production. This cut into Cooper’s revenue and made it impossible for the company to provide Apollo with the updated financial information it needed to secure financing for the deal.

The Chinese partner suggested the opposition was the result of concerns about Indian management of Chinese workers. In an advertisement it placed in The Wall Street Journal, it said, “Who can guarantee the success of integration between Chinese culture and Indian culture?”

But Chengshan’s opposition ultimately appeared less about Indian ownership than about being compensated. Locking Cooper out of the factory was seen by many as a ploy to extract a higher price, and when Cooper tried to force arbitration of the dispute into courts in Hong Kong, it failed, and the Chinese partner was able to keep the case mired in local courts.

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The problems with the unions and in China led Apollo to delay closing the deal, saying Cooper had agreed to lower its asking price.

In October, Cooper filed a complaint in Delaware Chancery Court, seeking to compel Apollo to complete the deal.

Cooper indicated it would pursue damages against Apollo. Because Cooper walked away from the deal, it may owe Apollo a $50 million breakup fee and will not receive a breakup fee from Apollo unless a judge rules Apollo broke the agreement. Apollo said it would also pursue remedies in court.

“It is time to move our business forward,” Cooper’s chief executive, Roy Armes, said in a statement. Shares of Cooper initially fell but rebounded and closed up 5.4 percent at $24.20 on Monday.