M & A CritiqueIn June 2013, Apollo Tyre’s Limited announced that it would acquire Cooper Tire & Rubber Company in an all-cash transaction valued at $2.5 billion. But Copper decided first to terminate the deal, reasoning that Apollo could not mobilize funds to pay for the deal.
Copper’s views
The chief reason for termination of this merger transaction is that the Apollo’s lenders refused to extend their financing commitments and it was withdrawn. As Apollo planned to borrow almost the entire purchase price from Morgan Stanley, Deutsche Bank AG, Goldman
Sachs Group and Standard Chartered Bank Ltd, it could not raise the funds.
Apollo’s views
For Apollo to conclude financing of the deal, it was of paramount importance to know the consolidated financial details of Cooper Tire, including that of its Chinese JV, which people close to the development say, Cooper was not able to submit to Apollo Tyres. Cooper’s lack of control over its largest Chinese subsidiary Cooper Chengshan Tire Company and inability to meet its legal and contractual financial reporting obligations i.e. renegotiation with US workers, strong opposition from the Chinese partner and non‐availability of financial details of the Chinese joint venture company of Cooper Chengshan Tire (CCT) were considered as some of the major roadblocks for completing the deal.
What went into the deal?
Cooper went to court in Delaware, claiming that Apollo delayed the deal and asked it to complete the merger. Apollo countered, arguing that Cooper was not doing enough to help it finalize the deal and stated that the purchase price of the deal must be reduced by as much as $9 a share because of the unexpected problems it had encountered, including the Chengshan situation and negotiations with the United Steelworkers union. An arbitrator had ruled Apollo had to abide by a clause requiring it to accept Cooper’s labor unions but the Indian company had yet to negotiate a contract with the Steelworkers union.
After the deal with Apollo was announced, the management and workers at CCT protested by going on strike and cutting production. The management refused to provide Cooper with its financial data, making it impossible for Cooper to provide Apollo with the updated financial information it needed to secure financing for the deal.
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 but Cooper has been unwilling to work constructively to complete a transaction that would have created value for both the companies and their shareholders.
Who was liable for cancelling the deal?
As part of the negotiation i.e. Definitive merger agreement, Apollo Tyres would have been liable to pay $112.5 million, (Rs 690 crore) in case it decides to withdraw, while Cooper would have had to pay a termination penalty of $50 million (Rs 307 crore) if it walks out of the deal. On the other hand, if the deal would have stretched beyond December 31, none of the companies would be liable to pay anything.
On the question of who is liable to pay for damages on the deal not coming through. In fact, Cooper in an investor conference call had said it does not believe that the $50 million termination fee applies. The company is pursuing the reverse termination fees of $112.5 million from Apollo Tyres for not completing the deal. Cooper believes Apollo has breached the merger agreement, and they will continue to pursue the legal steps necessary to protect the interests of the company and their stockholders.
Cooper had taken Apollo to court for not completing the deal. The Delaware lower court of Chancery had ruled in favour of the Indian company, stating that it had not breached its obligation under the deal. Further, the Delaware’s Supreme Court was slated to hear arguments mid‐December but it admitted that the appeal had been “improvidently accepted,” which meant that the case shouldn’t have been heard by the court at all.
Now, whether there can be a penalty or some kind of financial liability on Apollo because of any legal recourse that Cooper wants to take, the probability may be lower because whatever court judgment has come so far has come in favour of Apollo.
Effects of cancellation of deal on Apollo
- It saved the company of shouldering an enormous debt burden
- It enabled the company to focus on growing its business in other ways that may make sense to shareholders.
- The collapse leaves Apollo to focus on a slowing home market, which provides two‐thirds of its revenue.
- Apollo can now play catch up with MRF
CONCLUSION:
The deal was billed as the biggest Merger & Acquisitions deal in the Indian automotive industry’s history even bigger than Tata Motor’s acquisition of Jaguar Land Rover. Indian companies are looking overseas as the domestic economy grows at its slowest in a decade but have struggled to convince investors after debt‐fuelled takeovers like Tata Steel’s $13 billion purchase of Anglo‐Dutch Corus in 2007 fared poorly. So the market cheers were implied on the deal collapse.
