A case study on the deal, why the merger failed, what were the issues involved. legalities, financials, structuring etc.

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By:
Nipun Gupta (15)
Adarsh Jain (17)
Shreyansh Kejriwal (26)
Srujana Satyavada (40)
Aprajita Singh (49)

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Tyre Industry
 Origin of Indian Tyre Industry dates back to 1926 when Dunlop
Rubber Limited set up the first tyre company in West Bengal.
 MRF followed suit in 1946. Since then, the Indian tyre industry has
grown rapidly.
 Indian Tyre Industry now provides direct and indirect employment
to nearly 1 million persons, including dealers, retraders, growers of
Natural Rubber, employment in raw material sector etc.
 While the tyre industry is largely dominated by the organized
sector, the unorganized sector is predominant with respect to
bicycle tyres.
 The total number of tyre dealers, geographically spread all over
the country is over 5,000 - serviced through over 500 depots of
tyre companies.

3. +
Pre Deal
Conditions

4. +
Nature of the Industry
 Tyre Industry is highly raw-material intensive. Raw materials cost
accounts for approx. 63% of tyre industry turnover and 72% of
production cost.
 The industry is a major consumer of the domestic rubber market.
Natural rubber constitutes 80% while synthetic rubber constitutes only
20% of the material content in Indian tyres
 62% of total Natural Rubber consumption is by the Tyre Sector,
balance by rubber based non-tyre industries. Interestingly, world-wide,
the proportion of natural to synthetic rubber in tyres is 30:70
 Total weight of raw-materials consumed by tyre industry – 15.50 Lakh
M.T.
 Total Cost of Raw Materials consumed by tyre industry – Rs.16,000
Crores

5. +
Cooper
 Together with its affiliates, subsidiaries and joint ventures has
manufacturing facilities on three continents, sales and
distribution networks around the world and products that meet
and exceed the demands of the world's most dynamic markets
 Primary focus is passenger car and light vehicle replacement
tires in North America
 An emerging OEM presence
 The 12th largest global tire manufacturer
 The fifth largest tire manufacturer in the U.S.
 Market share in the U.S. is 12 percent in the light vehicle
replacement market

6. +
Cooper
 Tire safety: Tires are designed and built with great care to
provide thousands of miles of excellent service. For maximum
benefit they must be maintained properly
 HR policy: The company is guided by a strong set of values
that we call "The Cooper Way." The Cooper Way is their
mantra-their way of being and behaving, it represents the
values they hold, and more important, the values they live by
each day
 Help Each other Succeed
 Have Engaged Communication
 Be Agile
 Provide World Class Customer Service
 Be Results Focused
 Do the Right Thing

7. +
Apollo
 Apollo Tyres Ltd, world's 17th biggest tyre manufacturer, with
annual consolidated revenues of Rs. 14,000 crore (US$2.5
billion) in 2011. It was founded in 1976. Its first plant was
commissioned in Perambra, Thrissur, Kerala. The company
now has four manufacturing units, one in South Africa, two in
Zimbabwe and 1 in Netherlands
 It has a network of over 4,000 dealerships in India, of which
over 2,500 are exclusive outlets. It gets 62.6% of its revenues
from India, 27.9% from Europe and 9.5% from Africa
 Exports reach over 70 destinations across the world.

8. +
Apollo
 Products
 Engaged in manufacture of automobile tires, tubes and tire re-
treading compound. The product portfolio of the Company consists
of passenger car, SUV, MUV, light truck, truck-bus, agriculture,
industrial, bicycle and off highway tires, retreading material and
tires, and alloy wheels
 HR policy
 The Apollo Way describes five simple values i.e. Business Ethics,
Care for Society, Empowerment, One family and Communicate
openly, as a way of life in the organisation
 Cross geography movements, training and development
strategies, recruitment practices, reward & recognition and
employee motivation strategies are the key focus areas
 Structured process for training and development within the
organisation at both corporate and local level

9. + Brief Snapshot of Deal
Acquirers Apollo Mauritius and its Subsidiary: Dutch
Holdco and Merger Subsidiary
Seller Cooper
Acquisition Acquisition by means of merger between Cooper
and Merger Subsidiary
Acquisition Price US$ 35 per share
Total
Consideration
US$ 2.5 billion

10. +
Reasons of the Deal
 Market Penetration
 Higher Margins Through Alteration Sales Mix
 Improved Distribution Network and Economies of Scale
 Long Term Growth Opportunities

11. +
Mode of Acquisition
 Agreement and Plan of Merger entered into between
Apollo Mauritius, Dutch Holdco, Merger Subsidiary and
Cooper for the merger of the Merger Subsidiary with and
into Cooper
 As a result of the Merger, the separate corporate
existence of the Merger Subsidiary shall cease Cooper
will continue as the surviving corporation post- Merger, as
an indirect, wholly owned subsidiary of Apollo
 Each share of Cooper’s common stock issued and
outstanding immediately prior to the effective time of the
Merger was to be converted into the right to receive US$
35 in cash, without interest

12. + Financial Consideration
 Apollo signed an agreement to acquire Cooper for a cash
consideration of ~ US$ 2.5 billion
 Deal would create the world’s seventh ranked tyre company
 Synergy - Management expects potential savings of
$80‐120mn which would accrue over a period of three years
 Apollo agreed to acquire Cooper for ~US$35 per share, a hefty
premium of 40% on Cooper’s 30-day volume-weighted average
stock price
 Deal was unreasonably overpriced given the various market
indicia of Cooper and the global economic conditions
 Apollo justified the deal as a combination of large market
access, a well-established brand and cost-competitive
plants

13. +
Mode of Funding
 Deal was completely debt-financed
 Standard Chartered sole provider of Deal- US$ 450 M. at the
Apollo Mauritius level to be serviced from the cash flows of Apollo
 US$ 450 M. to be transferred via equity to Dutch Holdco.
 Morgan Stanley, Deutsche Bank, Standard Chartered Bank and
Goldman Sachs Bank USA to provide committed funding of US$
2.375 B. to the Merged Subsidiary consisted of a US$ 1.875 B
bridge facility and a US$ 500 M revolving credit facility
 The bridge loan to be refinanced by the issue of high-yield junk
bonds to the tune of US$ 1.9 billion with tenure of 7 to 8 years
and coupon in the range of 6.75% to 9.5%
 Bullet repayment on the bonds of US$ 1.9 billion would be at the
end of the tenure of the bonds.

14. +
Legal and
Regulatory
Implications

15. + Regulatory Roadblocks Employment Approval
 At the time of announcement of the Deal, Cooper had
announced that it shall honor the terms of collective bargaining
agreements negotiated with its labor unions after the Merger.
 In September, a U.S arbitrator ruled against Cooper’s sale of
two of its factories to Apollo until a collective bargaining
agreement is reached between Apollo and members of the
plants’ unions.
 Dispute arose as a result of the United Steelworkers (“USW”)
arguing that the terms of the agreement, covering 2,500 USW
members will be violated without Apollo entering into new
collective bargaining agreement with the workers of the above
mentioned plants.
 Cooper had stated that it will be working with Apollo and USW
to resolve worker’s concerns.

16.  Lawsuit by Cooper
 In light of the unresolved labor disputes at the Cooper
Chengshan facility and the U.S plants, Apollo sought a
reduction in the Merger Consideration of US$ 35 per share,
saying it may not be feasible for Apollo and its lenders to
accept the Deal on the initially agreed pricing terms.
 This prompted Cooper to file a suit against the Acquirers in the
Delaware Chancery Court for expeditious closing of the Deal.
 Apollo sought for the dismissal of the suit, contending that
Cooper has been unable for a matter of months to access
basic financial material in relation to the joint venture about a
significant portion of its business and that Cooper was unable
to deliver all the assets that are part of the Deal.

17.  Exchange Control Regulations
 The US$ 450 million loan at the Apollo Mauritius level was
guaranteed by Apollo. The provisions of the Master Circular
on Direct Investment by Residents in Joint Venture (JV) /
Wholly Owned Subsidiary (WOS) Abroad (“ODI
Regulations”) permit an Indian company to undertake, in all
its JVs and WOS put together, a total financial commitment
which shall not exceed 400% of the net worth of the Indian
company as on the date of its last audited balance sheet,
under the automatic route.
 Current structure of Apollo says that the company has made
investments in a number of wholly owned subsidiaries in
Mauritius, South Africa, Netherlands, etc.
 For the purpose of calculation of the 400% investment limit,
the aggregate investment of Apollo in all these entities must
have been taken into account.

18. +
Issues
during the
Deal

19. +

20. +

21. +
Problem with Che Hongzhi
 Cooper Tire has a joint venture with the Chengshan Group called
Cooper Chengshan Tire Co, in which Cooper is the majority
shareholder with a stake of 65 percent.
 Che felt that the deal wasn’t fair to him and wanted that he should be
compensated but Apollo tyres ignored him.
 Moreover the bigger problem was that Apollo wasn’t even aware that
Che had bid for the same company and Cooper didn’t even consider
the proposal and didn’t inform Apollo
 After this, Che made the bid for Cooper at $38 3 more than Apollo’s
bid

22. +
Contd..
 According to Apollo’s due diligence, Che wouldn’t have
been a problem as Roy Armes had guaranteed that they
had a great working relationship with Che.
 The union and Che pointed that the deal was highly
leveraged and doesn’t guarantee meeting the needs of
the customers and workers
 Standard Chartered bank also asked Apollo to
reconsider the finances of the deal.
 CCT went on strike
 With China facility out-of-bounds the financing of the deal
was slowing down

23. +
Problem with the USW
 Cooper Tire and USW don’t have a history of getting along well.
 During the economic downturn of 2008, when fuel prices shot up
and US car sales came to a screeching halt, Cooper found itself in
the middle of a crisis
 As a part of due diligence, in early 2013, it was possible that post
the merger announcement, the union might raise a red flag

24. +
Contd..
 The union had ten demands, which included coverage of two
other plants (not unionised) and one-time bonuses for all union
members among several other conditions. By Apollo’s estimate,
the additional cost of meeting those demands was about $130-
140 million.
 The Apollo met with USW regarding a compensation but couldn’t
reach the settlement
 The USW went to arbitration court and court ruled in favour of
USW and asked them to include the compensation paid to them if
merger went through

25. +
Performance of
Apollo and Cooper
Post Deal

26. +
Apollo Tyre- Stock Price

27. +
Expansion
 Apollo spent Rs.3,800 crore in setting up a factory in Hungary,
the largest outside India for an Indian tyre company.
 It also spend Rs.2,000 crore on expanding the capacity of the
company’s factory in Chennai
 This investment, Kanwar said, will further Apollo’s cause in
becoming a $6 billion company by 2020.

28. +
Financials
Mar-2015
(in INR Cr.)
Mar-2014
(in INR Cr.)
Mar-2013
(in INR Cr.)
Sales 13,784 14,391 13,740
Expenses 10,767 11,567 11,382
Profit 1,930 1,875 1,456
Profit After
tax
977 1,005 613
EPS (in Rs) 19.18 19.94 12.18

29. +
Cooper Tyre- Stock Price

30. +
Cooper-Che Partnership And
Buyback of Shares
 The firm sold its 65 percent stake in CCT in November 2014 for
about $262 million
 Cooper Tire's board of directors also issued a share repurchase
authorization of up to $200 million through December 2016.
 It recently completed a $200 million accelerated share repurchase
program in August 2014 where it bought about 6.4 million shares at
an average price of $31.49 per share

31. +
Financials
Dec-2014
(in Cr. $)
Dec-2013
(in Cr. $)
Sales 34.24 34.39
Expenses 28.52 29.23
Profit 5.72 5.16
Net Income 2.13 1.11

32. +
Sectoral Conditions Post Deal
 Stock price recovery for both firms post the failure of the deal
 No significant mergers & acquisitions except of expansion by
Apollo and offloading CCT stake by Cooper
 Leadership rankings of most companies remained more or less
the same

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