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Cooper-Apollo Merger Faces Issues

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The future of Cooper Tire & Rubber Co.’s (CTB) $2.5 billion merger with Apollo Tyres Ltd. seems to be doubtful now that the two companies are engaged in a public clash over the deal. The problem was triggered by an arbitrator’s order requiring the two companies to reach a new agreement with United Steelworkers (:USW), the labor union that represents Cooper Tire’s workers in Findlay, Ohio and Texarkana, Arkansas.

Cooper Tires claims that Apollo Tyres is intentionally delaying reaching an agreement with the union to avoid the completion of the acquisition or to seek a better price. According to the terms of the contract, if the acquisition does not culminate by Dec 31, 2013, the merger agreement can be terminated without any penalty to either party.

Copper Tire filed a complaint in the Delaware Chancery Court last Friday requesting the court to coerce Apollo Tyres into completing the acquisition swiftly. However, Apollo Tyres claims that it is trying to reach an agreement with USW, although it will take time. Moreover, the company is alleging that Copper Tire’s accusation is an attempt to hide its inability to meet transaction-related obligations.

Meanwhile, the deal is also facing opposition from Cooper Tire’s Chinese joint venture partner Chengshan Group Co. and the Chinese labor union. The Chinese workers feel that the deal will jeopardize their employment and are seeking dissolution of the joint venture. They are on a strike and have stopped the production of Cooper Tire-branded tires. Moreover, they are not providing any operational or financial information to the company.

Meanwhile, Apollo Tyres is seeking a slash in the purchase price to compensate for the costs incurred while dealing with labor unions. According to Bloomberg, the India-based company wants an $8–$9 per share reduction in the purchase consideration.

The company had earlier agreed to pay a price of $35 per share to the shareholders of Cooper Tire, which includes a 40% premium on the 30-day volume-weighted average price of Cooper Tire at the time of the announcement of the deal. However, Cooper Tire is reluctant to accept the lower price.

The acquisition of Cooper Tire by a wholly owned subsidiary of Apollo Tyres was announced in Jun 2013. The transaction was approved by the board of both the companies before the deal was made public. Thereafter, the deal received clearance from both U.S. and foreign regulatory bodies and received an astounding 96% support of the voting shareholders of Cooper Tire.

If the acquisition is culminated, the resulting company will be the seventh-largest tire company in the world with presence in various lucrative markets such as North America, India, China, Latin America and Africa. Currently, Cooper Tire is the 11th largest tire company in the world, on the basis of revenues.

The acquisition will result in benefits of operating scale, sourcing benefits, technology, product optimization, and manufacturing improvements, which are expected to boost earnings before interest, taxes, depreciation and amortization (:EBITDA) by $80-120 million per annum after 3 years.

The uncertainty related to the deal is affecting investors’ confidence in Cooper Tires. The shares of the company plummeted 12.8% on Monday to close at $25.72 per share.

Cooper Tire currently carries a Zacks Rank #5 (Strong Sell). Some stocks that are worth considering in the same industry include Goodyear Tire & Rubber Company (GT), American Axle & Manufacturing Holdings Inc. (AXL) and Fuel Systems Solutions, Inc. (FSYS). All these companies carry a Zacks Rank #1 (Strong Buy).

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Read the Full Research Report on GT
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Read the Full Research Report on FSYS

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