Management Accounting

Cooper Tire Aims to Settle China JV Mess

After delays in financial reporting and a derailed merger, the tire manufacturer hopes to put a partnership's troubles in the company's rearview mi...
Vincent RyanFebruary 3, 2014

[Editor’s note: The initial version of this story overstated the size of the drop in Cooper Tire’s share price. CFO regrets the error.] 

Joint ventures can be a headache. Remember this GM-Toyota partnership? But Cooper Tire’s partnership in China proved to be a severe migraine, at least in the end. An eight-year joint venture with Chengshan Group not only derailed a  a buyout by an Indian competitor, it also left Findlay, Ohio-based Cooper Tire unable to file its third-quarter 2013 financial reports.

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Fortunately, Cooper Tire announced on January 31 that it has reached an agreement with Chengshan to end joint ownership of the venture, called CCT. Either Cooper (65 percent ownership) or Chengshan (35 percent ownership) will buy out the other’s stake. The venture could also proceed as is, but that seems risky. Cooper Tire, meanwhile, will apparently be able to resume financial reporting in March.

Analysis_Bug3But the damage has been done. Cooper Tire is now suing its former Indian suitor, Apollo Tryes, over a $112.5 million breakup fee, and the company’s share price is about 36 percent off its 52-week high. (Not surprising, since it hasn’t filed an earnings report since August 8.)

The trouble started in June 2013 when Apollo agreed to acquire Cooper; shareholders ratified the deal the following September. Workers at the joint venture’s production plant in China, incensed, locked Cooper’s management out of the offices and went on strike. CCT’s management also refused to give Cooper access to the factory’s financial records. “As many of you know, following the announcement of the merger agreement with Apollo, there was an immediate and very negative reaction to the merger at CCT,” Cooper Tire CEO Roy V. Armes said on Friday. “These actions included refusal to enter operational and financial data into company computer systems.”

Apollo went so far as to offer to buy out Chengshan Group’s interest in CCT, but Chengshan wanted Apollo to double its $200 million bid. That gave Apollo cold feet, since it couldn’t effectively value a unit that was responsible for about one-quarter of Cooper’s $4.2 billion in revenue. When Apollo tried to renegotiate the overall deal price with Cooper, things really started to unravel.

On Friday, Armes said the new agreement with Chengshan “puts Cooper in a position to resume and sustain regular financial reporting.” CFO Brad Hughes said, “With the activity taking place to enter and verify data, we expect to report our third quarter results by early March. And then by mid- to late-March, Cooper expects to report fourth quarter and full-year 2013 earnings.”

Importantly, with access to financial data now, Cooper Tire can value (through an independent firm) the CCT business in preparation for a buyout. The companies plan to complete the valuation within 60 days of Cooper filing 2013 financials, Hughes said.

The ball, though, is really in Chengshan’s court. It has three options: execute its call option and buy Cooper’s 65 percent stake in CCT; execute its put option, selling its 35 percent stake in CCT to Cooper; or decide to execute neither the call nor the put option within a 45-day period. If Chengshan takes the last choice, Cooper then has the right to execute its call option and acquire Chengshan’s 35 percent stake in CCT.

Fortunately, Cooper Tire has other production and original equipment manufacturer partnerships in China, which, as Armes pointed out on the call, “is expected to grow by about 60 percent cumulatively over the next five years to become the largest tire market in the world.” The only question now is how fast Cooper can put this truly disruptive problem behind it and get on with business in a key emerging market.

Source: Cooper Tire ends Merger Pact with Apollo Tyres