Cooper, Apollo scrapping in court over merger terms

The Cooper Tire & Rubber Co.-Apollo Tyres Ltd. proposed marriage is off to a rocky start — and things could go downhill from there.

On Oct. 4, just four days after Cooper's shareholders approved Apollo's $35 per share offer, Cooper filed suit in Delaware Chancery Court to compel Apollo to "expeditiously close the pending" $2.5 billion merger of the two companies.

In the suit Cooper accuses Apollo of attempting to renegotiate or even scupper the firms' merger pact by "seeking to delay an agreement" with the United Steelworkers (USW) union at two Cooper U.S. plants—as ordered by an arbitrator on Sept. 13 after the USW sought arbitration, claiming the sale to Apollo would violate successorship provisions of the union's contracts with Cooper.

Apollo, in a statement, claims that arbitrating the contracts at these two plants would involve making "material concessions" to the USW that would necessitate the need for financing or financial concessions in the terms of the deal with Cooper, and that Cooper "misrepresented its management and control" of the Cooper Chengshan (Shandong) Tire Co. Ltd. subsidiary in China to Apollo and to its own shareholders.

"Apollo finds it implausible that Cooper, having failed to resolve these issues for several months, would realistically expect to force Apollo to concede material issues on Cooper's accelerated timeline," the company said.

Apollo is seeking to roll back its $35 per share offer by at least $2.50 a share and perhaps as much as $9 a share, Cooper claims in its suit.

The Delaware Chancery Court has agreed to hear the case in early November, Cooper said.

Apollo also accuses Cooper of "reckless hopefulness, bad faith or worse" in its financial forecasting for the current fiscal year. According to Apollo, Cooper forecast it would report $380 million in operating income this year on sales of $4.3 billion. It revised these figures downward three times over seven weeks, to sales of $3.4 billion and operating income of $257 million—declines of 25 and 48 percent, respectively.

"…these persistently missed forecasts have eroded any shred of credibility (Cooper) has with us," according to a letter to Cooper signed by Apollo's Vishal Mittal.

COOPER TIRE & RUBBER CO. PHOTO

Roy Armes, Chairman, CEO and president, Cooper TIre & Rubber Co.

From Cooper's viewpoint, Chairman, CEO and President Roy Armes said the firm "has an obligation to protect the rights of our stockholders, who voted overwhelmingly in favor of the merger.

"With their approval, we have met our conditions for closing. The complaint…is a necessary step in the process to assure that the terms of the merger agreement are met as required and that we do everything possible to get the transaction closed promptly," he added in a prepared statement.

Shareholders representing 78 percent of Cooper's outstanding shares voted at the Sept. 30 meeting, with 96 percent of those voting favoring the offer, Cooper said. The positive vote represents 74 percent of all outstanding shares.

Since peaking at $34.80 a share in mid-June, Cooper's share price slipped back to less than $26 a share on Oct. 7.

Cooper also is asking the court to award it monetary damages from Apollo, in an "amount to be proven at trial," sufficient in scope to compensate it for losses incurred due to "Apollo's knowing, deliberate and material breaches of contract." It also seeks reimbursement of attorneys' fees and any other costs in connection with bringing its action.

Cooper filed the suit in Delaware because both it and defendant Apollo Acquisition Corp. — an entity set up by Apollo Tyres for the purpose of entering into the merger agreement — are Delaware corporations.

Should Apollo opt to back out of the proposed takeover, it would face a "reverse buyout" penalty of $112.5 million, according to Cooper documents. However, if the deal drags out to Dec. 31 without resolution, the parties can walk away from the deal, provided neither has "materially breached" the agreement.

The two parties are facing a key deadline of Nov. 15, according to financial community sources who said that's the date the banks arranging the financing for Apollo have said they must have complete financial accounting from the two sides in order to continue with the planned launch of securities.

By delaying resolving the arbitration with the USW, Apollo is breaching the merger agreement, Cooper claims.

"The strategic rationale for the merger with Apollo is solid, and we look forward to finalizing the transaction…," Mr. Armes said. "Apollo is an outstanding company. We are confident both organizations will work effectively together to take advantage of the many opportunities this compelling transaction will offer…."

While continuing to stress its belief that a merger with Cooper is "compelling from a strategic perspective," Apollo said it has engaged actuarial advisers to evaluate the financial impact of certain of the USW's requests, some of which it accuses Cooper of having been "unwilling to provide" in the three months since Cooper and Apollo announced their intent to merge and the opening of arbitration.

In its suit, Cooper accuses Apollo of meeting with USW representatives on several occasions without anyone from Cooper present, in spite of requests by the USW to the contrary.

Additionally, Apollo said it has asked Cooper to confirm that Cooper has sufficient control over and access to Cooper Chengshan (Shandong) Tire Co. Ltd., its majority-owned subsidiary in China to permit it to deliver current consolidated financial information and auditors' comfort letters and that Cooper is in compliance with covenants and representations in the merger agreement.

To date, Apollo said, Cooper has been "unable or unwilling to provide these confirmations."

In addition, the firm said Cooper's inability to access the facilities of its Chinese subsidiary, to determine what products this subsidiary is producing or to whom those products are being sold, to track or control how its funds are being spent or even to access operating or financial information, either physically or remotely, goes well beyond any typical work stoppage.

In its suit, Cooper acknowledges that workers at the Cooper Chengshan factory, backed by the minority owners, Chengshan Group, are refusing to build any Cooper-brand tires and have rebuffed Cooper efforts to enter the factory, and that management there is blocking Cooper's access to financial statements and has stopped entering financial data into accounting systems to which Cooper has access.

While Apollo continues to support Cooper's efforts to establish control over Cooper Chengshan and to assert Cooper's rights against its joint venture partner in China, "Apollo cannot be responsible for Cooper's failures to do so," the Indian tire maker said.

Apollo and its financing banks, Morgan Stanley, Deutsche Bank, Goldman Sachs and Standard Chartered Bank, Apo