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The Deal: Apollo's Call for Price Cut Grows Louder

NEW YORK (The Deal) -- Apollo Tyres filed its counterclaims regarding the Delaware dispute over its troubled $2.5 billion merger with Cooper Tire & Rubber (CTB - Get Report)

Apollo states that it remains committed to closing the Cooper merger, which it values for its synergies, but also states that without a price cut it may no longer be able to justify the merger. 

Cooper filed a complaint in Delaware Court of Chancery earlier this month claiming Apollo was dragging its feet in order to let the financing commitments for the $35 per share deal expire at the end of the year. It claimed that Apollo was holding up negotiations with the United Steelworkers union and holding back on the financing. 

Apollo, in its counterclaims says it continues to negotiate in good faith with the USW and is open to compromises. It also claims that Cooper's troubled relationship with the union and behind the scenes suggestions that the union should seek greater concessions have obstructed the process. Apollo states that renegotiation of the deal price is not a precondition to negotiations or and agreement with the USW, but that any economically significant concessions may not be feasible for Apollo or financing sources without appropriate changes to the economic terms of the merger. 

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Although in a statement Oct. 6 Apollo said Cooper has acknowledged that some price reduction is warranted, Cooper's position has been that no price cut is warranted. 

Apollo claims that Cooper is not in compliance with the terms of the merger agreement because it has not been able to provide required information that is compliant through a 20-business-day marketing period for the debt. The parties are in dispute over whether that marketing period has begun or not, a disagreement that largely turns on the provision of that required information. 

In the court filing, Apollo takes the position that Cooper's repeated downward projection of revenue and operating profit from July through September impaired its ability to pursue financing without further clarity into Coopers North American business. It also claims that Cooper's problems with its joint venture in China, Cooper Chengshan (Shandong) Tire Co. also impaired its ability to provide the required information and shows a breach of Cooper's representations in the merger agreement. The Chinese joint venture employees went on strike in opposition to the merger and its managerial and financial risks and, while having resumed some operations in August have not allowed Cooper management access to its facilities or financial information. Apollo argues that financial information is crucial to selling debt for the deal because the JV represents a significant part of Cooper's business. 

Cooper argues in its complaint that both the USW negotiation, which has been mandated through arbitration and is now a condition to the deal, and the China JV problems are both results of the announcement of the merger and, as such, carved out of the material adverse change clause. Apollo is not arguing a MAC issue, and that a condition of the merger agreement has not been met. The JV issues also show that Apollo is not in control of assets, which is a breach of representations. 

It is difficult to determine who has the better arguments or to figure out how to trade the deal, a risk arbitrageur said. 

As is often the case, testimony in court on issues like the USW negotiations will inform whether either party was not using best efforts to cut a deal with the union. Regarding the issue of whether the marketing period had begun or not and the provision of required information, Cooper might have a better position, an arb said. The required information has to be reasonably requested, and it may well be that if seeking the information in China would put your employees at risk, that is not reasonable, he said. 

The deal spread Tuesday was $9.10, or 35%. 

Written by Scott Stuart.

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