Mumbai, Sept. 16: A rash of lawsuits in the US and China are threatening to snuff out Apollo Tyres’ ambitions of buying out Cooper Tire and Rubber in the US under a $2.5 billion deal that the two sides struck on June 12.
Cooper’s shareholders are due to vote on the Apollo buyout at a special meeting on September 30, which is supposed to set the stage for closing the transaction by the end of December.
But a couple of adverse developments in the past week have the potential to scupper the deal.
Last Friday, a US arbitrator delivered a body blow to the deal when he blocked the sale of two out of three Cooper plants as the unionised workers hadn’t given their consent to the deal. Workers have been concerned over the terms of the deal which they feel will pile Cooper Tires with onerous debt.
Cooper Tire and Apollo Tyres said they would hold talks with United Steelworkers (USW), the union that had filed the lawsuit.
“Apollo looks forward to working with Cooper and the USW to resolve this matter. The strategic merits of Apollo’s combination with Cooper are clear,” a spokesperson from Apollo Tyres told The Telegraph in an e-mailed response.
The indication is that Apollo, at least for now, is going to press on with the acquisition of Cooper to help create the world’s seventh largest tyre maker with a presence in four continents.
Earlier, the Chengshan group in China had approached a local court seeking dissolution of its joint venture with Cooper Tire — which is, in one sense, the raison d’etre for the deal as it promises Onkar Kanwar’s Apollo Tyres a beachhead in the world’s fastest-growing tyre market.
Under the terms of the agreement, Cooper stockholders will receive $35 per share in cash.
The transaction is supposed to be completed by the end of the year, but the latest developments have cast a fog of uncertainty over the agreed timelines.
On Friday, James Oldham, an arbitrator in the US, ruled that Cooper could not sell its two plants located in Ohio and Texas until Apollo Tyres reaching a collective bargaining agreement with the workers union USW that represents around 2,500 workers at the two facilities.
This means that Apollo will have to enter into an agreement with the union on the terms and conditions of employment. It will also have to recognise USW as the representative of the employees.
The spokesperson was, however, silent on the developments in China where Cooper Tire’s partner — the Chengshan Group — had gone to court in July seeking the dissolution of the venture. The Weihai Intermediate People’s Court has postponed the hearing to an undetermined date. Apart from this venture, Cooper has another facility in China.
The Chinese joint venture operates Cooper’s biggest manufacturing facility worldwide and is considered crucial to the success of the deal. Workers at the facility are learnt to have earlier stopped producing Cooper-branded tyres.
Observers say the development in China may delay the deal if the venture is dissolved. Apollo may then have to re-negotiate the terms of the agreement. They, however, add that it is premature to talk of such a possibility since the Chinese court has yet to give its ruling.
Several shareholders of Cooper Tires have also filed several class action suits against Cooper and Apollo in which they have accused the US tyremakers’ directors of failing to execute their fiduciary duties.
Apollo Tyres is funding the equity portion of the deal through a $450 million debt taken from StanChart. The loan has been extended to Apollo (Mauritius) Holdings Pvt Ltd, which is spearheading the acquisition.
Four investment banks are also providing an asset-backed revolving credit facility worth $500 million to Apollo’s entities in the Netherlands and the US.
The rest will come out of borrowings of $2.1 billion that will be back-stopped by the cash flows of Cooper.
Under the deal, Cooper will issue first lien secured notes worth $1.86 billion either through private placement or an underwritten sale. If the notes fail to raise the required sum, a bridge to bond facility will kick in to make up for any shortfall. The Cooper notes and the bridge facility will be guaranteed by Apollo’s Dutch subsidiary.
But Cooper’s shareholders and workers are worried that the US tyremaker is taking on more debt than it can shoulder, sparking the lawsuits in Ohio and Delaware.