Mumbai, Dec. 30: Cooper Tire & Rubber Company today terminated its $2.5-billion merger agreement with Apollo Tyres, just over six months after it had clinched a deal that was touted to create the world’s seventh-largest tyre maker.
The US tyre maker scrapped the deal a day before the so-called “outside drop dead date” of December 31 for concluding the merger.
“It is time to move our business forward,” said Cooper chairman, CEO and president Roy Armes.
“While the strategic rationale for a business combination with Apollo is compelling, it is clear that the merger agreement both companies signed on June 12 will not be consummated by Apollo and we have been notified that financing for the transaction is no longer available. The right thing for Cooper now is to focus on continuing to build our business.”
The US tyre maker said it would, however, pursue legal steps against Apollo for a breach of the merger agreement by failing to close the deal. The original closing date in the agreement was Oct- ober 4.
If Apollo is found to be in breach of the agreement — a charge that it denies — the Indian tyre maker will have to pay a break-up fee of $112.5 million to Cooper Tire.
“Apollo is disappointed that Cooper has prematurely attempted to terminate our merger agreement,” the Apollo Tyres spokesperson said. “Cooper’s actions leave Apollo no choice but to pursue legal remedies for Cooper’s detrimental conduct.”
“Apollo has many other compelling growth opportunities around the world that we are continuing to pursue,” the spokesperson added.
Under the terms of the merger, Cooper will have to pay monetary damages of $50 million if it failed to meet its obligations.
“While Cooper’s lack of control over its largest subsidiary and inability to meet its legal and contractual financial reporting obligations has considerably complicated the situation, Apollo 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,” the Apollo spokesperson said.
Apollo has always insisted that it is under no obligation to reach an agreement with the United Steelworkers (USW) -- a powerful labour union representing workers at two Cooper plants – before the “drop dead” date of December 31. It is only after that date that a non-breaching party is free to terminate the agreement without attracting a penalty.
Cooper accused Apollo of deliberately stalling on the agreement after a US court mandated that Apollo had to assume financial obligations under a deal that Cooper had struck earlier with the unions before it could conclude the merger.
Apollo was planning to finance the deal through a mix of equity and debt financing. The equity portion of the payout was supposed to come through a loan of $ 450 million from Standard Chartered that was guaranteed by Apollo Tyres.
The debt financing of $2.375 billion consisted of a $500 million asset-based revolving credit facility and a $1.875 billion senior secured bridge-to-bond facility, which were provided by Morgan Stanley, Deutsche Bank, Goldman Sachs, and Standard Chartered Bank.
It wasn’t immediately clear which part of the funding arrangement had fallen through and who had notified Cooper.
Cooper Tire’s decisions caps an acrimonious dispute between the partners that broke out after the US tyremaker’s joint venture partner in China, the Chengshan Group company, filed in court for the dissolution of the joint venture. Cooper holds a 65 per cent stake in Cooper Chengshan (Shandong) Tire Company Ltd, the Chinese venture, which was one of the most attractive features of the agreement as it would give Apollo a beachhead in the world’s fastest-growing market for tyres.
Chinese workers have not produced Cooper tyres at the plant since the middle of July and the joint venture has stopped providing financial information on its operations to Cooper Tire. The US company said on November 12 that it was unable to provide information about the Chinese operation in its results for the quarter ended September 30 – giving Apollo the opportunity to seize on that disclosure to charge it with a breach of its obligations.
The dispute escalated after a US court said Apollo would have to re-negotiate labour agreements with workers at two US plants before the merger could go through.
Cooper has argued that Apollo had suffered a “buyer’s remorse” after it struck the deal and Indian analysts panned the agreement by saying that Apollo was taking on a huge debt to pay a 40 per cent premium of Cooper share to close the deal.
Apollo has denied that charge. The company claimed that before the deal was signed, Apollo officials had met with Chengshan executives where they learnt that the Chengshan Group wanted to be compensated in some way if a merger transaction between Cooper and Apollo occurred.
Media reports say that Sunam Sarkar, Apollo’s chief financial officer, had told Delaware Chancery Court Judge Sam Glasscock that far from being overcome by buyer’s remorse, they had offered to purchase Cooper’s Chinese unit for $ 147 million. The Chengshan group apparently rejected the offer and instead wanted $ 200 million.
“Addressing the situation at Cooper Chengshan Tire (CCT) in Rongcheng, China is our top priority in the near term,” Armes said. “With the the agreement now terminated, Cooper is working independently to restore normal operations at CCT, including obtaining the information needed for Cooper to resume regular financial reporting as soon as possible.”