Apollo and Cooper can still do a deal

November 12, 2013

By Una Galani
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

The buyout of Cooper Tire & Rubber Co hasn’t gone flat yet. The U.S. company and Indian buyer Apollo Tyres are locked in a legal battle over an agreed $35 per share offer. But both sides insist they still see merit in a union that will create the world’s seventh biggest tyre manufacturer. Adjusting Apollo’s offer to reflect the potential cost of removing the two main roadblocks to the deal suggests a revised bid of at least $27 per share.

The recent ruling by a Delaware court that Apollo had not deliberately delayed the transaction means the chances of the $2.3 billion takeover going ahead as planned are slim. There are two reasons the Indian company wants a lower price. The first is securing the backing of unhappy labour unions at Cooper’s plants in the United States. Apollo reckons this will cost $125 million, though Cooper thinks the bill will be less than a tenth of that.

The bigger headache is the minority shareholder in Cooper’s Chinese joint venture, which has been agitating against the deal. Apollo says Chengshan Group demanded $400 million to sell its 35 percent stake in the joint venture. That’s twice what the Indian company offered to pay back in September.

Add the two worst-case estimates together, and Apollo would have to stump up an extra $525 million. Subtract that amount from its original offer, and Cooper is worth $27 per share – a mere 10 percent premium to the company’s pre-bid price in June.

Cooper shareholders might balk at such a low price. But the Chinese dispute has exposed the U.S. company’s loose grip on its joint venture, which contributes around a quarter of revenue and earnings. Assuming the subsidiary’s value is just 25 percent less than before would reduce Cooper’s standalone value by $100 million, leaving it worth around $23 per share.

The culture clash exposed by the court case suggests an Apollo-Cooper union might struggle at any price. But if the Indian company genuinely still wants to go ahead, Cooper shareholders may well decide a lower offer from Apollo – or a rival bidder – is preferable to going it alone.

 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/