Cooper Tire Breakup Caps Bad Year for Emerging Market Deals

NEW YORK (TheStreet) -- Talk about getting it wrong.

When U.S. tire manufacturer Cooper Tire & Rubber (CTB) unveiled a deal to be acquired by Apollo Tyre of India for $2.5 billion, TheStreet analyzed the transaction and said it could indicate an increasingly global automotive industry as emerging market consumers enter the car market.

About half a year later the merger is off. The failed tie-up between the two tire-manufacturers might serve to cool the appetite of U.S. firms selling themselves to emerging market buyers, and vice versa.

Already, it's been a messy year for M&A between U.S. and emerging market companies.

In May, AIG (AIG) was jolted when it found out an investor group led by New China Trust wasn't able to make a 10% down payment on a $5.28 billion deal to buy a majority stake in the insurer's aviation finance unit, International Lease Finance Corporation. The deal eventually fell apart, and AIG spent much of the second half of 2013 scrambling for a new buyer for ILFC.

Earlier in December, AerCap Holdings (AER) of the Netherlands agreed to buy ILFC from AIG for $5.4 billion, in a deal that could help AIG institute a meaningful dividend in 2014.

Still, there are few things that reflect worse on a management team than a failed merger.

Smithfield Foods almost became another cautionary tale of U.S.-to-emerging market corporate activity. Shortly after announcing a $7.1 billion deal to be acquired by Shuanghui International Holdings of China, U.S. lawmakers balked at the tie-up citing national security concerns. It is worth noting Smithfield Foods is best known as a maker of pork and beef products and that Shaunghui is among the largest pork processors in China.

Starboard Value, an activist hedge fund, also balked at the deal and instead proposed a breakup of the foods giant. 

In the end, a Committee on Foreign Investment in the U.S. review approved Shaunghui's acquisition of Smithfield, as did the company's shareholders. Unionized employee contracts were one area where the Smithfield deal with Shuanghui succeeded and the Cooper/Apollo deal failed.

While Shuanghui was able to offer Smithfield's unionized workers status quo, Cooper's deal with Apollo Tyre was marred with labor disputes in China and the U.S.

In May, the United Food and Commercial Workers International Union, one of the biggest union representatives of Smithfield workers, backed the company's plan to be acquired by Shaunghui, possible muting negative publicity over the transaction. "The UFCW is pleased that workers in our communities can benefit from the growth and expansion of the U.S. pork industry," the union said.

In contrast, worker disputes and the seemingly stretched finances of Apollo Tyre undermined any transaction with Cooper Tire. Prospective lawsuits are now the only likely remnant of the deal, which would have been among the biggest acquisition of a U.S. company by an Indian firm.

After announcing the deal with Apollo, workers at Cooper Chengshan Tire (CCT), a Chinese joint venture, walked out and protested prospective cultural clashes with their new owners. Apollo Tyre also faced large hurdles with U.S. workers after a Delaware judge ruled that the Indian tire manufacturer would be on the hook for negotiating new contracts with the United Steelworkers union.

Because of those headwinds, Apollo Tyre asked Cooper for a lower price in its takeover, a point that the Findlay, Ohio-based company was unwilling to concede. Indian shareholders in Apollo Tyre, meanwhile, revolted the transaction from day one, indicating that some either believed the acquisition was dilutive or that the company was stretching its finances too far in the $2.5 billion acquisition.

"While the strategic rationale for a business combination with Apollo is compelling, it is clear that the merger agreement both companies signed on June 12 will not be consummated by Apollo and we have been notified that financing for the transaction is no longer available. The right thing for Cooper now is to focus on continuing to build our business," Roy Armes, Cooper Tire's CEO said in a Monday statement.

A messy deal on all fronts.

Cooper Tire shares were trading less than 1% lower in Monday afternoon trading. Shares in the company have fallen over 10% year-to-date and are about 35% off Apollo Tyre's $35 a share initial offer price.

The question is whether deals like Apollo Tyre's failed effort for Cooper Tire and New China Trust's similarly botched deal with AIG cools merger efforts between U.S. and emerging market firms.

The confusion this year in U.S. and emerging market mergers also comes as some regulators set the seeds for possible deal activity in coming years. In 2012, the Federal Reserve granted China's state-sponsored banking giants charters in the U.S., a development some expect could eventually lead to increasing ties between U.S. and Chinese lenders.

Private equity giant KKR & Co., meanwhile, invested heavily in Qingdao Haier, a minority investment that may help the Chinese appliance manufacturer's expansion in the U.S.

-- Written by Antoine Gara in New York

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