Shares of Cooper Tire & Rubber Co. (CTB - Analyst Report) plunged 17% to $22.34 on Friday, after the Delaware Court of Chancery rejected its claims that Apollo Tyres Ltd. was breaching the terms of its merger agreement with the former by intentionally delaying an agreement with the United Steelworkers (USW). Cooper Tire revealed that it is dissatisfied with the court’s decision and is considering options while waiting for other rulings related to the case.
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 the U.S. and foreign regulatory bodies and was supported by an astounding 96% of Cooper Tire’s voting shareholders.
However, the $2.5 billion acquisition started facing trouble soon, with both parties hurling accusations at each other. The problem was triggered by an arbitrator’s order requiring the two companies to reach a new agreement with USW, the labor union that represents Cooper Tire’s workers in Findlay, Ohio and Texarkana, Ark. While Cooper Tire claimed that Apollo Tyres was intentionally delaying an agreement with the labor union to avoid the completion of the acquisition or to seek a better price, the latter claimed that it is trying to reach an agreement with USW, although it will take time.
According to the terms of the contract, if the acquisition does not culminate by Dec 31, 2013 and if neither party breaches the merger agreement, the agreement can be terminated without any penalty to either party.
As a result, in October, Copper Tire requested the court to coerce Apollo Tyres into completing the acquisition promptly. Thereafter, Apollo Tyres filed a counter-claim stating that Cooper Tire has not provided adequate information required for closing the merger, including access to accounts and other documents.
Apollo Tyres also expressed doubts regarding the control Cooper Tire has over its Chinese subsidiary, Cooper Chengshan Tire. The merger deal is 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 have stopped the production of Cooper Tire-branded tires and are not providing any financial information to the company.
Apollo Tyres revealed in court that it tried to overcome the opposition by offering to purchase Cooper Tire’s Chinese unit. However, the executives of Cooper Tire’s Chinese joint venture rejected its buyout offer and demanded a higher price for the deal.
As a result of the trouble with the Chinese partners, Apollo Tyres is having difficulty in selling bonds to finance the deal. Moreover, Cooper Tire is facing trouble in filing its third quarter financial results due to lack of information related to its Chinese operations, which contribute about one-fourth of its revenues.
According to media reports, Apollo Tyres is seeking to reduce the purchase price from $35 per share, particularly due to costs incurred while dealing with the labor unions. However, Cooper Tire is reluctant to accept the lower price. The decision is pending in court and depends on whether Cooper Tire can prove that it has fulfilled all the conditions of the deal.
If the acquisition culminates, the resulting company will be the seventh-largest tire company in the world with presence in lucrative markets such as North America, India, China, Latin America and Africa. Currently, Cooper Tire is the world’s 11th largest tire company on the basis of revenues.
The acquisition will result in benefits of operating scale, sourcing, 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.
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 - Analyst Report), Continental AG (CTTAY) and Bridgestone Corp. . Continental AG carries a Zacks Rank #1 (Strong Buy), while Goodyear and Bridgestone carry a Zacks Rank #2 (Buy).