Deflated expectations

Cooper-Apollo spat forces investors to pick lanes 14 October 2013 | By Una Galani, Peter Thal Larsen How it works By Una Galani and Peter Thal Larsen This interactive calculator considers four outcomes in Apollo Tyres' $2.5 billion bid for Cooper Tire & Rubber. One possibility is that the offer goes ahead at the agreed price of $35 per Cooper share. Alternatively, the deal could fail. Cooper shares would then fall to their pre-bid level, minus a discount for the damage suffered by Cooper's China joint venture. However, Apollo and Cooper could also renegotiate the deal. The calculator considers two outcomes: one where Apollo pays the same 40 percent premium to Cooper's reduced standalone value, and one where it pays a premium of just 20 percent. Based on the likelihood of each scenario, the calculator computes at a probability-weighted share price for Cooper. Users can change the probabilities in blue, provided the the total adds up to 100%. The resulting share price is displayed in red. For more interactive calculators and agenda-setting comment visit: www.breakingviews.com Cooper Tire & Rubber has won a fast-track handling of its complaint against India’s Apollo Tyres, paving the way for the case to be heard in early November. The U.S. company filed a complaint against Apollo in a Delaware court on Oct. 4 seeking to compel the Indian buyer to complete its agreed $35-per-share acquisition. The $2.5 billion transaction faces grievances from U.S. steelworkers and employees at Cooper’s joint venture in China. Apollo is seeking a reduction in the acquisition price by around $3 per share, according to a person familiar with the company. Cooper shares closed at $25.81 on Oct. 11. Investors in Cooper Tire & Rubber are being forced to pick lanes. Legal wrangles have put Apollo Tyres’ agreed $2.5 billion offer for its U.S. rival in doubt, and tensions at its China joint venture have undermined Cooper’s value. But a negotiated price reduction still looks possible. Cooper shares may be pricing in too much bad news. Cooper shareholders must choose between four broad outcomes. The least likely is that the deal goes ahead on the agreed terms of $35 per share. Apollo has made it clear that it would like a lower price. Its lenders are also getting cold feet. If the deal falls apart, Cooper shares might be expected to fall back to their pre-bid price of $24.50. But the wrangle with Apollo has exposed the U.S. company’s less-than-firm grip on its Chinese joint venture, which contributes around a quarter of its parent’s revenue and earnings. Assume the subsidiary’s value is reduced by 25 percent, and Cooper’s standalone value drops by $100 million, equivalent to $23 a share. There is room for negotiation between these two extremes. One possibility is that Apollo adjusts Cooper’s value to reflect the reduced value of the Chinese business and then applies the same 40 percent premium as before. In that case, Cooper shareholders would receive around $32 a share. Apollo might, however, seek to pay a lower premium. Say it offers just 20 percent more than Cooper’s reduced standalone value. Shareholders would then be presented with an offer worth just $28 a share. Investors are taking a dim view. Take Cooper’s closing share price of $25.81 on Oct. 11. One way of interpreting that number is that investors think there is zero chance of the deal going ahead at the original price, a 60 percent probability of failure, and just a 20 percent possibility of either renegotiation scenario proving correct, according to a Breakingviews calculator. The longer the dispute drags on, the greater the damage to Cooper’s value. But that also makes it more likely that the U.S. company renegotiates with Apollo – or finds another bidder. Cooper shareholders aren’t attaching much probability to that lane providing an exit from the current mess.