What next for Cooper and Apollo?
While it is clear that each side is effectively blaming the other for the collapse of the deal, the actual cost of the defunct courtship ritual is somewhat more opaque. We know that Cooper’s lawyers will be defending the firm against claims for the $50 million it agreed in the business equivalent of a pre-nuptial agreement, but several newspapers report that Apollo has to fight off claims for a significantly bigger $112 million break-up fee. And of course none of this puts a price on the large sums of money spent out on corporate lawyers or even more importantly on lost time. So what’s next for the two companies?
As far as the two firm’s share prices are concerned Cooper’s is on the up compared with lows at the end of December. Likewise the market received Apollo’s stock well following the ending of acquisition talks. However it is Apollo that is garnering the strongest market reaction so far. Analysts writing in the Indian Financial Express, for example, upgraded their 2014 consolidated net earnings estimates for Apollo by 48 per cent and for 2015 by 21 per cent. Interestingly the analysts also upgraded their target price to 125 rupees/share and chose to exclude deal break-up fees worth around 14 rupees a share from its base-case scenario. It might be too much to read this as a sign that Apollo will escape without paying a break-up fee, but these business watchers did switch positions from “sell” to “buy” after the deal termination news was announced.
Indeed the analysts echoed other industry voices when they said: “We believed this acquisition to be overleveraged (the combined entity’s debt level would have increased by nearly nine times to $2.8 billion) and aggressive…Even one bad year of operations could have severely hampered Apollo’s ability to service the interest as well as the principal repayments.”
As happy as they are, these analysts also spoke of “significant capex/acquisition [investments]” as being the key threats to its theory. And this point – it must be said – is central. When you look at Apollo’s track record (especially with regard to Cooper) the business is nothing if not ambitious and is clearly willing to grow by acquisition – the purchases of Dunlop South Africa and then Vredestein demonstrate this. The fact that Apollo’s official response to the Cooper deal’s breakdown included the detail that there are “many other compelling growth opportunities around the world that [Apollo is] continuing to pursue” would seem to emphasise this point. Indeed the use of the word “compelling”, which was of course how the two firms described their erstwhile combination when it was first announced last summer, would certainly seem to indicate this. Which naturally begs the question – what opportunities? Or is this this simply a way of raising an open-ended question to keep market watchers hooked until the next big deal is unveiled?
The question of what Cooper will do next is perhaps best left to those writing on the other side of the pond. Perhaps indicating that that a board reshuffle (if not a massacre) could be on the cards Tire Review’s editor Jim Smith, put it like this: “…should Cooper shareholders, hopped up by the prospects of a $35 per share payoff, find only coal in their Christmas stocking, I would suspect we’ll see more than a few changes in 2014.”