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Apollo Gets Sued by Cooper for Not Doing Things Fast Enough

Apollo’s deal with Cooper is in some jeopardy. In an SEC Filing, Cooper Tire has sued Apollo for not putting “reasonable best efforts” to complete the $2.5 billion deal. The problem? The first sign of trouble was a strike at Cooper’s Chinese plant, where it owns 65%, the remaining 35% is with Chengshan, who has a tyre brand in China.

FT says Chinese workers were concerned about the debt the company would take (Apollo is financing the deal by debt taken on Cooper’s books, mostly) and that they foresee a culture clash with an Indian company. Chengshan has sued to dissolve the joint venture and workers are only willing to negotiate if the deal is scuttled.

In the US, an arbitration ruling in September forced Apollo-Cooper to sing the merger until the companies reached a conclusive agreement with workers in two plants. It’s this agreement that is not being pushed hard enough by Apollo, says Cooper.

Cooper believes Apollo developed cold feet after the merger took it’s home share (in India) down from Rs. 92 to Rs. 56 in a few days on debt concerns. Thus, it needed an excuse, and while the Chinese strike doesn’t give it enough ammunition, the US ruling gives it a good reason.

Apollo must pay Cooper $112 million if it pushes away from the deal. Cooper must pay Apollo $50 million if it walks away. After December 2013, if the merger isn’t complete, there is no penalty.

Cooper shareholders voted in favour of the $35 per share acquisition recently, making one more prerequisite from the Cooper end an “okay”. Cooper says this is the end of their conditions for the deal.

However, Cooper has been shut out from the entire operations of the Chinese subsidiary. They can’t even access financial statements as workers don’t allow Cooper nominated employees to enter the factory. This lack of financial statements can jeopardise the deal, as it will be financed by lenders who will, at the very least, want to see complete financial statements. Cooper believes that this is Apollo’s problem, unless the deal is delayed till November 15 (at which point it becomes Cooper’s responsibility if the merger isn’t done by then).

Apollo says the Chinese plant’s control by Cooper has been misrepresented and that the US union negotiations will add costs not really bearable. Apollo has supposedly asked to cut the buying price from $35, down to a $2.5 lower number, or as low as a $8 lower.

In all of the name calling one thing is evident, even if Apollo wins this, it will be difficult for them to work with all the factories easily later. Also the acrimony between Apollo and Cooper is evident, and it might now be that if the merger does go through, some of these people will quit.

Apollo Typres shares rose to Rs. 70 on this news (up nearly 6%). Cooper shares are down 12% to $25, and things look bleak even for their recovery of $112 million breakup fee.

Disclosure: Long some Apollo.