After months of tit-for-tat carping about who breached what contract, and with internal opposition to a buyout as strong as ever, Cooper Tire & Rubber (NYSE:CTB) announced yesterday it was sending a merger proposal to the trash heap. With financing no longer available to complete the transaction, Cooper said it was ending the buyout agreement with India's Apollo Tyre.
The $35 a share, $2.5 billion bid by Apollo to acquire the U.S. tire maker jumped off the starting line when it was first proposed back in June, as both management teams supported the deal. It quickly ran off the road thereafter.
The 2,500 workers at two Cooper plants represented by the United Steelworkers union filed a complaint with an arbitrator saying the two tire makers weren't living up to the terms of a "successorship clause" in its labor contract that requires a buyer to recognize the unions and negotiate a new labor agreement prior to completing a sale. The union was worried Apollo would pile a load of debt onto Cooper to finance the acquisition that would leave it unable to pay pension obligations in the future.
Perhaps it had good reason to be. Apollo's plan was to lard Cooper with $1.9 billion in junk bonds the U.S. tire maker would issue, which analysts estimate would cause the combined company's debt to soar by nine times to $2.8 billion. There was enough consternation about the arrangement that Apollo's stock lost a quarter of its value on the Bombay Stock Exchange when it was announced, causing the Indian tire maker to hurriedly claim it wasn't taking on the debt, Cooper was, and there would be no annual payments needed on most of the loans over their seven- or eight-year maturity period.
That was hardly comforting to U.S. steelworkers, as it would put its debt at around 42% of its $6.6 billion in combined annual revenues. In comparison, Goodyear Tire & Rubber has long-term debt of about $6.4 billion, or about a third of its $19.8 billion in trailing revenues.
Then a Chinese plant rose in revolt, refusing to make Cooper tires and locking management out of the building while also refusing to turn over paperwork. Workers were worried their jobs would be on the chopping block if the deal went through, but the rift also caused Cooper to delay filing its quarterly returns because it didn't have the financial information available to file them. China accounted for 21% of Cooper's revenues in 2012.
After an arbitrator agreed Apollo had to negotiate with the union, the takeover process bogged down and Cooper headed to court saying Apollo was twiddling its thumbs. The Indian tire maker responded it couldn't move forward because it didn't have all the necessary paperwork from Cooper, which had it thinking perhaps it bid too much for the company to start with and maybe it should lower the offer.
A court subsequently ruled Apollo hadn't breached the merger agreement, and despite not even making it to the altar yet, they're already planning for the divorce. Apollo says it has no choice but to pursue legal remedies against Cooper, while the U.S. tire maker says it's not liable for the $50 million breakup fee that would otherwise be due, and in fact, will be seeking a $112.5 million reverse termination fee.
With the merger being towed away to the scrap yard, Cooper says it's still a strong company and will end the year profitably, though without quarterly financial information, investors can't be so sure.
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