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With merger deal over, Cooper, Apollo eye future

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FINDLAY, Ohio—Six months of disputes and court battles resulted in the not-so-surprising announcement by Cooper Tire & Rubber Co. on Dec. 30 that it had terminated its merger agreement with India's Apollo Tyres Ltd.

Cooper's move came a day before the merger pact's deadline for Apollo to terminate the agreement if the parties had not concluded the negotiated terms satisfactorily.

"It is time to move our business forward," said Roy Armes, Cooper chairman, CEO and president. "While the strategic rationale for a business combination with Apollo is compelling, it is clear that the merger agreement both companies signed on June 12 will not be consummated by Apollo, and we have been notified that financing for the transaction is no longer available. The right thing for Cooper now is to focus on continuing to build our business."

Apollo responded that it "is disappointed that Cooper has prematurely attempted to terminate our merger agreement.

"While Cooper's lack of control over its largest subsidiary and inability to meet its legal and contractual financial reporting obligations has considerably complicated the situation, Apollo has made exhaustive efforts to find a sensible way forward over the last several months. However, Cooper has been unwilling to work constructively to complete a transaction that would have created value for both companies.

"Cooper's actions leave Apollo no choice but to pursue legal remedies for Cooper's detrimental conduct."

Since signing the merger plan, the tire makers have been embroiled in a court battle in the Delaware Chancery Court, accusing each other of not fulfilling terms of the agreement.

One of the stumbling blocks has been securing financial information from Cooper's joint venture, Cooper Chengshan Tire in Rong-cheng, China. Cooper owns 65 percent of CCT, with China's Chengshan Group holding the rest.

Cooper said striking workers at the Cooper Chengshan factory, backed by the minority owners, Chengshan Group, were refusing to build any Cooper-brand tires and have rebuffed Cooper efforts to enter the factory. Management there also was blocking Cooper's access to financial statements and has stopped entering financial data into accounting systems to which Cooper has access.

"The issues at CCT were driven by the merger agreement, and with the agreement now terminated, Cooper is working independently to restore normal operations at CCT, including obtaining the information needed for Cooper to resume regular financial reporting as soon as possible. Once the situation at CCT is resolved and regular financial reporting has resumed, Cooper will be in a position to address additional options for the deployment of capital targeted at returning value for our stockholders," Armes said.

Cooper will continue to pursue legal claims against Apollo. The firm claims the agreement's $50 million fee against Cooper, if Cooper terminates the agreement, doesn't apply. However, it will pursue the $112.5 million termination fee against Apollo along with other damages.

Cooper is ranked by Rubber & Plastics News as the 11th largest tire maker worldwide while Gurgaon, India-based Apollo is ranked 16th. The $2.5 billion deal would have created an entity with about $6.6 billion in annual sales and a No. 7 spot in the global tire maker ranking.

However, the events that transpired following announcement of the agreement seemed to serve as harbingers of the eventual termination:

• More than 5,000 workers at the CCT facility went on strike to protest the Apollo takeover of Cooper, according to China's Xinsua state news agency. Union leaders reportedly were trying to block the transaction from taking place because they didn't believe Apollo could repay the debt it will take on to finance the acquisition. That in turn could put the workers' jobs and pay in jeopardy.

• The United Steelworkers union representing workers at Cooper's Texar-kana, Ark., and Findlay plants filed a grievance on Aug. 1 alleging that Cooper had violated the successorship provisions of the collective bargaining agreement applicable to each plant by entering into the merger agreement.

• On Oct. 4, just four days after Cooper's shareholders approved Apollo's $35 per share offer, Cooper filed suit in Delaware Chancery Court to compel Apollo to "expeditiously" close the deal.

In the suit Cooper accused Apollo of attempting to renegotiate or even torpedo the merger pact by "seeking to delay an agreement" with the USW and to roll back its $35 per share offer by at least $2.50 a share and perhaps as much as $9 a share,

Apollo claimed that arbitrating the contracts at the two U.S. plants would involve making "material concessions" to the USW that would necessitate the need for financing or financial concessions in the terms of the deal with Cooper, and that Cooper "misrepresented its management and control" of the CCT.

Apollo also accused Cooper of "reckless hopefulness, bad faith or worse" in its financial forecasting for the 2013 fiscal year.

Future options

Cooper Chairman, CEO and President Roy Armes.

Cooper said working on restoring normal relations with CCT will be its first priority before looking at other options, including possible merger agreements.

It was reported earlier that Cooper Tire actively was courting at least one other interested suitor up until the June 12 agreement was signed with Apollo, which had shown interest in Cooper since at least mid-2011. Cooper said it had been approached and/or held discussions with as many as 10 possible other suitors, including three tire makers, to gauge their interest level.

Besides Apollo, another serious suitor, which Cooper would only describe as a consortium group of strategic and financial sponsors, was considering an offer last spring in the $33 to $35 per share range, Cooper said, but it needed more time to complete due diligence.

Apollo has indicated it is looking elsewhere to expand its business after losing its chance to create a foothold in the U.S.

"Importantly, Apollo has many other compelling growth opportunities around the world that we are continuing to pursue. Our business is performing well—as evidenced by the strong top and bottom line results we reported last quarter—and we remain focused on executing our stand-alone strategic plan to maximize value for Apollo's shareholders. We are confident Apollo is well-positioned for continued success," it said.

Dealer reaction

Many tire dealers were not surprised by the announcement.

Dennis Leipold of Cuyahoga Falls, Ohio-based Leipold Tire Co. was glad that the agreement was terminated.

"Their (Cooper's) tires having been doing so well for us for so many years, we didn't want to see anyone mess with the recipe," he said.

About 90 percent of his sales are Cooper products. He said Cooper has a good reputation and a respected name among customers. "And when you throw in there that it's American and based in Ohio, that just throws some apple pie on everything, and you got smiles, American flag and apple pie and Cooper tires."

Leipold said the proposed merger didn't make sense to him. "A company that is smaller than Cooper is financing to buy Cooper, and they are in India, and they don't get along with the Chinese, and they are not going to get along with the unions? The whole thing was like ... putting a cat and a dog together, as far as I could tell."

Mike Hamad, manager of Hamad Tire Inc. in Akron, was glad about the news.

"I would like to see Cooper remain Cooper for as long as possible. An American-owned, Ohio-built tire—that's great," he said.

About 30 percent of Hamad's tire sales are Cooper's Mastercraft brand. "I think a great selling point with Mastercraft is it is an American-owned company and an Ohio-built tire," said Hamad, whose father, Chuck Hamad, owns the dealership that operates four locations in northern Ohio.

However, William Watkins, owner of Owego, N.Y.-based wholesaler Moore's Tire Sales Inc., was hoping for improvements with the proposed merger.

"I was kind of looking forward to a change at Cooper Tire. I was kind of hoping just to see if it could get better. And with a change and new people I thought maybe it would," he said.

For the past six months, he said, Cooper's fill rates have "gone downhill."

Cooper's tires account for about 70 percent of Moore's Tire sales—about $40 million a year, he said. This past year, his Cooper sales have remained flat.

"I expect to see (Cooper) work harder to keep my business and put some more deals in front of me than they ever have before to keep me," Watkins said. "So if those deals are in the best interest of my company, I would certainly take advantage of them. They're going to have to work that much harder to keep us."