Apollo-Cooper fight puts bankers in the spotlight

The legal battle over Cooper Tire & Rubber has put banks in the spotlight. Emails shown in court reveal lenders to Apollo Tyres have been looking for a way out of the debt-financed takeover of its U.S. rival and pressured the Indian company to renegotiate the $2.3 billion deal. Banks appear keen to limit their exposure while avoiding blame for pulling the plug.

Apollo already had little room for error when the Cooper tie-up was announced in June. The debt it took on would leave the enlarged company's EBITDA margin around 300 basis points higher than its interest payments, Kotak Securities calculated based on the original offer. That's a thin cushion in the volatile tyre-making business. Apollo's shares slumped.

Problems at Cooper's operations in the U.S. and China that emerged after the deal was announced make it even riskier. An arbitrator ruled in September that Apollo must first reach an agreement with Cooper's United Steelworkers (USW) union before the deal could proceed. Even more seriously, the minority partner at Cooper's China operation demanded $400 million from Apollo to be bought out of the joint venture. Giving in to both those demands would undermine Apollo's plans to pay off its debt.

The merger agreement doesn't allow Apollo to use the China problems as a reason to back out of the deal. Behind the scenes, however, lenders discussed whether Apollo could wriggle off the hook or negotiate a lower price. In an email dated Sept. 14, Morgan Stanley managing director William Dotson raised the possibility of Apollo dragging out negotiations with the unions and letting the deal expire. On Sept. 30 Sumit Dayal, Standard Chartered's global head of strategic finance encouraged Apollo to seek a price reduction and warned against closing the deal until the China problem was solved. Morgan Stanley, Standard Chartered and Apollo all declined to comment.

Though the banks are not the subject of the court battle, they could still be dragged into the fight. A Delaware court next month will rule whether Apollo must close the deal on its agreed terms. Banks will then have to decide whether to honour their original commitment to their client or try to protect themselves from what is now a much riskier loan. Whatever the outcome, the courtroom revelations don't show them in a good light.

CONTEXT NEWS

- India's Apollo Tyres was under pressure from its bankers to renegotiate the agreed $2.3 billion takeover of U.S rival Cooper Tire & Rubber Co. following labour disruption at its operations in China and the United States, according to emails shown in a Delaware court and reviewed by Reuters Breakingviews.

- Workers at Cooper's majority-owned joint venture in China went on strike following the announcement of the Apollo takeover in June. Separately, a U.S. arbitrator ruled in September that Cooper must reach a new agreement with United Steelworkers (USW) before it could sell two of its key factories.

- Cooper will on Dec. 19 seek a ruling from the Delaware Supreme Court that could force the Indian company to complete the agreed deal on the original terms.

- Morgan Stanley, Deutsche Bank, Goldman Sachs, and Standard Chartered agreed to finance the deal through a $1.9 billion bridge facility and a $500 million revolving credit facility. In addition, Standard Chartered committed $450 million of debt financing, according to the original merger agreement.

- "I hope your meetings with USW are productive this week and you are successful in achieving some reduction in the acquisition price resulting from this development", Standard Chartered's global head of strategic finance Sumit Dayal wrote in an email to Apollo's vice chairman Neeraj Kanwar on Sept. 30.

- "My sincere suggestion would be that China ought to be settled to your satisfaction before you pull the trigger on the deal despite the legal position. I am sure you will weigh these risks in the coming days as eventually there just a few of us who are taking real risks here", Dayal added. Standard Chartered and Apollo declined to comment on the email.

- "Hypothetically, what would prevent Air [the code name for Apollo] from taking a very difficult position with the USW and then watching the clock run out to the end of the year? In other words, does Air now have an out to the deal?" William Dotson, managing director at Morgan Stanley, asked in an email to a lawyer and a colleague on Sept. 14. Morgan Stanley declined to comment.