11/18/2013 Updated 11/26/2013

Apollo lands first punch in merger battle with Cooper

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By Miles Moore

WILMINGTON, Del.—Apollo Tyres Ltd. won the first battle, but its war with Cooper Tire & Rubber Co. is far from over.

On Nov. 8, the day after a three-day trial before the Delaware Chancery Court, Judge Sam Glasscock III made a partial bench ruling that Apollo had not breached the terms of its merger agreement with Cooper by asking for a purchase price that would shave at least $2.50 per share from the $2.5 billion deal, and perhaps as much as $9.

Four days later, Cooper announced it would appeal Glasscock's decision before the Delaware Supreme Court.

It remains to be settled whether Apollo tried to renege on a $35-per-share merger deal with Cooper, or if the U.S. tire maker forced Apollo to ask for a lower per-share price by misrepresenting its earnings outlook and ties with its Chinese subsidiary.

"Cooper entered into the agreement with Apollo in a position of strength," the Findlay, Ohio-based tire maker said in a press release.

Cooper generated record profits in 2012 and the first quarter of 2013, and operating profit was up in the first six months of 2013 compared with the same period in 2012, Cooper said. This was what attracted Apollo to make a bid for Cooper, the company said.

In its own statement, Apollo said it was pleased with Glasscock's ruling.

"The court found that Apollo had used "reasonable best efforts' to negotiate with the United Steelworkers union and that, contrary to Cooper's claims, "nothing in Apollo's conduct indicates buyer's remorse,' " Apollo said.

In a letter dated Nov. 9, the day after he issued his bench verdict, Glasscock said Cooper had until Nov. 14 to maintain its right to compel Apollo to complete the merger.

Third-quarter results delayed

Continuing problems at Chengshan (Shandong) Tire Co. Ltd. (CCT), Cooper's Chinese joint venture with Chengshan Group Co. Ltd., made it difficult for Cooper to issue its third-quarter financial report by Nov. 14. Cooper Chief Financial Officer Bradley Hughes testified to this in court Nov. 5.

But if the third-quarter results did not come out by then, Cooper will not be entitled thereafter to compel the merger, Glasscock said in his letter.

On Nov. 12, Cooper filed a document with the Securities and Exchange Commission, informing the SEC that the third-quarter results would have to be delayed until CCT provides necessary information to allow their completion.

Cooper said it seeks not only "specific performance" of the merger (i.e. an order compelling Apollo to complete the deal exactly according to the negotiated terms) but also a declaration regarding the parties' rights and obligations under the merger agreement, which the Chancery Court has not yet decided.

"While an inability to issue third-quarter results might affect the availability of the current financing, it does not provide Apollo with any ground for avoiding its obligations under the merger agreement," Cooper said.

"The court's ruling made clear that Apollo has to use its reasonable best efforts to close the remaining conditions," it said.

For its part, Apollo said it doesn't agree with Cooper that the proposed merger caused Cooper's lack of control over CCT.

"Cooper is again attempting to avoid rather than accept its responsibility for the situation at CCT, as it has done throughout this process," Apollo said.

Points of contention

Cooper filed its suit with the Chancery Court Oct. 4, seeking specific performance of the $2.5 billion merger agreement reached June 12.

In the absence of specific performance, Cooper sought financial compensation for all losses it sustained from the merger, along with attorneys' fees and court costs.

Cooper accused Apollo of a "knowing, deliberate, and material breach of the merger agreement." In reply, Apollo said, "Cooper is seeking prematurely and without claim of right to specifically enforce the merger agreement before it has satisfied the closing conditions and while it itself is in material breach of the merger agreement."

Among the major points of contention were:

• Whether Apollo deliberately delayed making an agreement with the USW and sought to get the per-share price of Cooper's stock reduced based on an unrealistic estimate of the cost of such an agreement;

• Whether Cooper misrepresented its long-term financial outlook to Apollo during merger negotiations; and

• Whether Cooper downplayed the likelihood of strife with CCT based on Chengshan's disapproval of the merger.

At the Nov. 5 court hearing, 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."

In further questioning, Armes said he knew Apollo's estimates were high because Cooper recently had settled a dispute with the USW for considerably less.

In his Nov. 5 testimony, Hughes acknowledged that Cooper's second-quarter earnings were less than originally projected.

The final figures were released shortly after the merger was announced, and Apollo said the earlier projections influenced its decision to agree to the merger.

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. He insisted, however, 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-cost way of Apollo entering the Chinese market."

Instead, according to court documents, union workers at 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, the Chinese company no longer manufactures Cooper-brand tires, according to Hughes. Cooper executives also are barred from the CCT plant, he said, except for Chief Technology Officer Kurt Reid and a few others.

Cooper's executive committee 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 merger's future

Despite the lawsuit, Apollo said it is still interested in proceeding with the merger.

"We remain committed to finding a sensible way forward for all affected stakeholders, including the USW, and look forward to seeing Cooper's updated financials when available," the company said.

Cooper, however, is adamant about proceeding only under the original terms of the agreement.

The outside date for completion of the merger is Dec. 31 of this year, Cooper said. "If the failure to close by that date is caused by Apollo's breach, it cannot terminate the merger agreement even then," it said. "If the financing becomes unavailable, Apollo has obligations to secure alternative financing."

After Glasscock's decision, Cooper's shares fell 11.5 percent on the New York Stock Exchange. On Nov. 12, however, Apollo reported a 44 percent increase in its net profit in its second quarter.