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The Deal: Cooper Gains Upper Hand in Delaware Case

Stocks in this article: CTB

NEW YORK (The Deal) -- The Delaware trial over the $2.5 billion acquisition of Cooper Tire & Rubber Co. (CTB - Get Report) by Apollo Tyres of India seems to be leaning in Cooper's favor.

The court battle over whether either side of the tire manufacturing deal failed to make best efforts to complete the transaction ends this week.

Cooper shares remained at a discount of roughly $9 to their $35 value in the merger, but rose about $2.20, or 9%, Thursday.

Increasingly, it looks like Apollo will be found to have dragged its feet over coming to a resolution regarding the United Steelworkers' labor issues, a risk arbitrageur said.

Debt commitments for the troubled merger were set to expire at the end of the year. Steelworkers' labor agreements, negotiated last year by Cooper, became an issue after an arbitration dispute in August determined that the labor contracts required renegotiation because of the change of control with the Apollo deal.

Labor issues at a Cooper joint venture in China also have plagued the transaction and been a key matter in the Delaware dispute regarding Cooper's obligation under the merger agreement to provide financing information to Apollo and its banks.

The resolution of the trial is not clear-cut, arbs said. It is obvious there is not going to be a $35 per share deal - the terms of the merger agreement - but a settlement is the reasonable solution, arbs said.

The situation looks better for Cooper than when the trial began, but there are a lot of crosscurrents, so it remains a tough call as far as trading the deal, an arb said. Both parties seem to have behaved badly regarding delivering their best efforts under the merger contract, the arb said. It makes sense that they would reach some settlement because the outcome is too uncertain, he added.

The problem is that Apollo could be determined to be in breach of the merger agreement, but unable to secure the financing for the deal, an arb said. Under that scenario, it makes sense to Cooper to settle, he said.

The outcome could be a revised deal with a price cut of $3 to $3.50 per share, some arbs speculate. But it is not clear that the parties still want to complete a merger.

Cooper last week presented a possible solution for the steelworkers' labor issues, but that agreement expires next week and appears as much a proffering before the court as a resolution to the complex issues that must be overcome to resurrect and complete a revised transaction.

Written by Scott Stuart

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