Columnist highlights lenders’ role in Apollo/Cooper problems

Writing on Reuters Breakingviews, corporate finance columnist Una Galani draws attention to how financial institutions contributed towards the current tensions between Apollo Tyres and Cooper Tire & Rubber. She opines that Apollo’s move to renegotiate its Cooper acquisition deal and seek a buying price less than the US$2.5 billion originally offered was pushed by attempts from Apollo’s lenders to extricate themselves from the takeover agreement.

“E-mails shown in court reveal lenders to Apollo Tyres have been looking for a way out of the debt-financed takeover of its US rival and pressured the Indian company to renegotiate the $2.3 billion (sic) deal,” writes Galani. “Banks appear keen to limit their exposure while avoiding blame for pulling the plug.”

Apollo shareholders and investors were quick to question the high leverage involved in the acquisition of Cooper and the potential future impact this may have on margins. On the very day the company announced its planned acquisition of Cooper Tire, shares in Apollo Tyres Ltd fell up to 21 per cent in value. In the weeks that followed, several institutional investors reportedly spoke with Apollo management and implored them to reconsider the deal.

Galani notes that Indian stockbroking firm Kotak Securities calculated Apollo’s EBITDA margin would be (based on the original offered purchase price) around 300 basis points higher than its interest payments following the acquisition. “That’s a thin cushion in the volatile tyre-making business,” she comments. She adds that problems at the Cooper Chengshan operation in China further undermined Apollo’s plan to repay the debt it would take on; and while under the merger agreement this doesn’t give Apollo grounds to walk away from the deal, Galani says lenders privately discussed whether the Indian tyre maker could “wriggle off the hook or negotiate a lower price.” She makes particular reference to an e-mail written by Morgan Stanley managing director William Dotson on 14 September.

Dotson wrote of a possible scenario where Apollo allows negotiations with United Steelworkers representatives to remain open until the deal’s expiry date – he allegedly recommended “watching the clock run out (on the deal) to the end of the year.” Two weeks later, Sumit Dayal, Standard Chartered’s global head of strategic finance, is said to have suggested Apollo negotiate a lower price for Cooper and warned that the deal should not be closed until issues with Cooper Chengshan were resolved. Galani reports that “Morgan Stanley, Standard Chartered and Apollo all declined to comment” regarding these alleged communications.

So far the lender banks have sat on the sidelines while Apollo and Cooper slog it out, however the Breakingviews columnist believes they may soon take on a more high profile role. When Cooper’s appeal hearing takes place in the Delaware Supreme Court next month, a ruling will be made on whether Apollo should be compelled to close the deal at its agreed terms. The lender banks must then decide whether they will honour their commitments or move to protect themselves from what they see as a risky loan. Galani’s view is that “whatever the outcome, the courtroom revelations don’t show them in a good light.”