By Aradhana Aravindan and Rafael Nam
MUMBAI (Reuters) - U.S.-based Cooper Tire & Rubber Co said it was terminating a proposed $2.5 billion sale to Apollo Tyres Ltd , with both sides threatening legal action over a deal plagued by obstacles from the start.
Cooper Tire said on Monday it was walking away after being informed by the Indian tire maker that financing was no longer available for a takeover that would have been India's second biggest in the United States.
Cooper added it would pursue legal steps to protect the company. Apollo responded by saying it was "disappointed" that Cooper had prematurely ended the agreement, and that it would pursue legal remedies of its own.
Those threats could continue a legal stand-off between the two sides, whose relationship descended into acrimony soon after Apollo agreed to buy Cooper for $35 a share in June, hoping to transform itself into the world's seventh-largest tire maker and cut its dependence on domestic sales.
The dispute is likely to focus on whether either company is liable to pay a break-up fee. Under the deal terms, Apollo would have been liable to pay a $112.5 million fee, while Cooper could be held responsible for break-up fee of $50 million.
"Cooper does not believe the $50 million termination fee applies. As to the $112.5 million reverse termination fee from Apollo, Cooper is pursuing this and other possible damages," Chief Financial Officer Bradley Hughes said on a conference call.
Despite the threat of legal action, the collapse of the deal may be welcomed by Apollo investors who had expressed concern over the debt-funded acquisition of a company nearly three times its stock market value at that time.
Soon after the offer was made, Apollo sought a price cut of as much as $9 a share, citing Cooper's U.S. labor trouble and disruption at a Chinese joint venture.
"It is a positive for Apollo," said Nishant Vass at ICICI Direct, part of ICICI Securities, in Mumbai.
"The question remains whether there can be a penalty or some kind of financial liability on Apollo because of any legal recourse that Cooper wants to take."
Analysts were surprised Cooper had announced the termination before the offer from Apollo was set to expire on December 31.
The outcome itself was less of a surprise. Expectations the deal would unravel rose after a court in Delaware in November ruled the Indian tire maker had not breached its obligations, delivering a setback to Cooper's attempt to compel Apollo to close the deal.
An appeal by Cooper was dismissed by the Delaware Supreme Court this month. The case returned to the lower court, which asked for an update on January 10 on the status of the deal.
The two sides have been at loggerheads for months, with Cooper accusing Apollo of suffering a case of buyer's remorse.
The Indian tire maker has blamed Cooper for its difficulties in securing financing for the deal, after initially lining up funding from Deutsche Bank , Goldman Sachs , Morgan Stanley and Standard Chartered .
At the heart of the dispute has been Apollo's failure to reach contract agreements with Cooper's United Steelworkers union as mandated by a U.S. arbitrator in September.
At the same time, Chengshan Group, Cooper's partner in China, has opposed any merger with Apollo, filing a lawsuit against the U.S. tire maker to dissolve their joint venture.
Apollo has said these two developments were not expected at the time of the deal, but Cooper maintains the issues are a result of the merger and says Apollo was aware of the risks.
"While Cooper's lack of control over its largest subsidiary and inability to meet its legal and contractual financial reporting obligations has considerably complicated the situation, Apollo has made exhaustive efforts to find a sensible way forward over the last several months," the Indian tire maker said in its statement.
"However, Cooper has been unwilling to work constructively to complete a transaction," it added. "Cooper's actions leave Apollo no choice but to pursue legal remedies for Cooper's detrimental conduct."
Meanwhile, Cooper Chief Executive Roy Armes said in his statement that addressing the joint venture in China and restoring normal operations was the company's top priority.
"We are open to all business paths including possible business combinations that further our strategy," CFO Hughes said on the call.
"Frankly though, until we address the situation at CCT (Chengshan) and restore our regular financial reporting for Cooper, we do not believe this is something that can be pursued in any meaningful way."
Larry Hamermesh, a professor at Widener University School of Law in Wilmington, Delaware said the failure to get Chengshan to agree to the deal had been the key factor that unraveled the deal.
"I think that's what really ultimately did the deal in. They (Cooper) just lost control of their Chinese joint venture," he said.
"Any purchaser who is looking at a target with significant Chinese operations has to find ways to gather assurances that the transition to the acquisition will be welcomed and not boycotted."
The collapse leaves Apollo to focus on a slowing home market, which provides two-thirds of its revenue. The tire maker in November said domestic sales had fallen 7 percent in July through September.
Indian companies are looking overseas as the domestic economy grows at its slowest in a decade, but have struggled to convince investors after debt-fueled takeovers like Tata Steel's $13 billion purchase of Anglo-Dutch Corus in 2007 fared poorly.
Apollo shares hit a record 104 rupees on Monday and are up over 10 percent since it first announced the deal in June. Cooper shares were at $23.99, well below the offer price.
(Additional reporting by Mridhula Raghavan in Bangalore, Swati Pandey in Mumbai, and Tom Hals in Delaware; Editing by David Holmes and Louise Heavens)
(This story was refiled to correct paragraphs 6 and 22 to attribute the quotes to CFO Bradley Hughes, not CEO Roy Armes)