Cooper's Armes: It was clear Apollo wanted price reduction

WILMINGTON, Del.—Two top Cooper Tire & Rubber Co. executives testified on the first day of a three-day trial in Delaware Chancery Court on Cooper's motion to force Apollo Tyres Ltd. to consummate its proposed $2.5 billion merger with Cooper.

Cooper filed suit Oct. 4 after Apollo sought to reduce its per-share offer for Cooper's outstanding shares by $2.50, to $32.50 from $35.

Among the issues brought up during testimony Nov. 5 was whether Apollo requested the per-share reduction after overestimating the cost of an agreement with the United Steelworkers union. Other issues included whether Cooper overestimated to Apollo its earnings outlook, and also whether Cooper underrepresented to Apollo the chances of trouble from Chengsan Group Co. Ltd., Cooper's joint-venture partner in China.

Cooper CEO Roy V. Armes testified about a Sept. 25, 2013, telephone conversation with Apollo's vice chairman, whom he said estimated the cost of a deal with the USW at $75 million-$125 million.

"It was clear he wanted a price reduction," Armes said. "I could not negotiate an agreement, then turn around and ask my shareholders to pay for it."

Armes said he thought Apollo's estimates for a union deal were "pretty high." Later in his testimony, he said he knew this because Cooper recently had settled a dispute with the USW for considerably less.

Bradley Hughes, Cooper's chief financial officer, said in his testimony that Cooper's second-quarter 2013 earnings turned out to be less than originally projected. Cooper and Apollo announced the merger June 12, shortly before Cooper released its final second-quarter figures.

Hughes quoted one of his former supervisors at Ford Motor Co.: "The one thing you know is that the forecast is going to be wrong."

Hughes blamed short-term issues with the startup of Cooper's new Enterprise Resource Policy system for the shortfall, as well as pricing issues, the tire industry's competitive environment and costs associated with the merger. But he also claimed that Cooper gave Apollo sufficient notice of these problems.

"I'm surprised they were surprised," he said.

In their questioning of Hughes, Apollo attorneys quoted Cooper documents telling Apollo that acquiring Cooper was "a low-risk way of Apollo entering the Chinese market."

Instead, according to court documents, union workers at Chengshan (Shandong) Tire Co. Ltd. (CCT), encouraged by management, went on strike June 21. Chengshan Group, according to Cooper, wanted to place its own bid on Cooper.

Although Cooper owns 65 percent of CCT, CCT no longer manufactures Cooper-brand tires, according to Hughes. Cooper executives also are barred from the CCT plant, except for Chief Technology Officer Kurt Reid and perhaps a few others, he said.

Cooper's executive committee also has approved a policy of not paying suppliers for future shipments to CCT, according to Hughes. "We thought that might encourage them to be more cooperative," he said.

The trial was slated to continue through Nov. 7. An attorney representing Apollo said Judge Sam Glasscock III might issue a bench verdict at the end of the trial, but that was unlikely regarding the volume of evidence.