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.


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