The buyout of Cooper Tire and Rubber hasn’t gone flat yet.
The United States company and its Indian suitor, Apollo Tyres, are locked in a legal battle over an agreed $35-a-share offer. But both sides insist they still see merit in a union that will create the world’s seventh-biggest tire maker. Adjusting Apollo’s offer to reflect the potential cost of removing the two main roadblocks to the deal suggests a revised bid of at least $27 a share.
The recent ruling by a Delaware court that Apollo had not deliberately delayed the transaction means the chances of the $2.3 billion takeover going ahead as planned are slim. There are two reasons the Indian company wants a lower price. The first is securing the backing of unhappy labor unions at Cooper’s plants in the United States. Apollo estimates this will cost $125 million, though Cooper thinks the bill will be less than a tenth of that.
The bigger headache is the minority shareholder in Cooper’s Chinese joint venture, which has been agitating against the deal. Apollo says the Chengshan Group demanded $400 million to sell its 35 percent stake in the joint venture. That’s twice what the Indian company offered to pay back in September.
Add the two worst-case estimates together, and Apollo would have to come up with an extra $525 million. Subtract that amount from its original offer, and Cooper is worth $27 a share â€" a mere 10 percent premium to the company’s prebid price in June.
Cooper shareholders might balk at such a low price. But the Chinese dispute has exposed the company’s loose grip on its joint venture, which contributes about a quarter of revenue and earnings. Assuming the subsidiary’s value is just 25 percent less than before would reduce Cooper’s standalone value by $100 million, leaving it worth about $23 a share.
The culture clash exposed by the court case suggests an Apollo-Cooper union might struggle at any price. But if the Indian company genuinely still wants to go ahead, Cooper shareholders may well decide a lower offer from Apollo â€" or a rival bidder â€" is preferable to going it alone.
Una Galani is the Asia corporate finance columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
