China: Culture crash; Apollo Tyres’ $2.5bn bid for Cooper Tire is being held back by an unusual obstacle

September 26, 2013 6:35 pm

China: Culture crash

By Tom Mitchell, James Crabtree and Robert Wright

Apollo Tyres’ $2.5bn bid for Cooper Tire is being held back by an unusual obstacle

The Cooper Chengshan Tire factory in eastern China has the feel of a place that is slowly coming back to life after a long siege. Three months after the factory’s 5,000-strong workforce first downed tools to protest about the proposed acquisition of their US parent by an Indian rival, employees in dark blue uniforms go about their tasks. But evidence of their continuing industrial action is festooned across the compound.A large bulletin board just inside the main entrance has been commandeered by the factory’s union, which has plastered it with a long letter objecting to the pending sale of Ohio-based Cooper Tire and Rubber Company to Apollo Tyres for $2.5bn. Elsewhere, large red and white banners urge the plant’s workers to continue their struggle against the deal – potentially the largest Indian acquisition of a US company.

Cooper’s hold on the factory, a joint venture with the Chengshan Group in Shandong province, has been slipping away ever since the Apollo transaction was announced in June. Several of its own managers have been barred from entering, even though the Ohio company has a controlling 65 per cent stake in the operation.

According to Chengshan executives, who are also fiercely opposed to the buyout, the union will not allow the facility’s Cooper-appointed managing director, finance director and human resources director into the plant. In a filing on August 30, Cooper stated that the workers were “denying access to certain representatives of the company and withholding certain business and financial information”.

Labour disputes are common in China. In the three years since workers in southern China successfully agitated for higher wages at plants operated by Japanese carmaker Honda and Foxconn, the Taiwanese contract manufacturer for Apple, their peers across the country have been quicker to strike in defence of their rights, even if the establishment of genuinely independent and nationally networked unions remains a distant dream .

But the Chinese industrial action targeting Apollo’s proposed takeover of Cooper, which would create the world’s seventh-largest tyremaker in revenue terms, goes far beyond a simple labour-versus-management dispute over wages or working conditions. Cooper’s Shandong workforce is instead intent on scuppering a big cross-border transaction in which neither buyer nor seller is based in China.

When Cooper promised workers a Rmb3,000 ($488) bonus each if they ended the industrial action, the union declined the offer. “It’s a fascinating situation – it’s groundbreaking,” says one person involved in the transaction.

Cooper’s Shandong workforce has cited issues ranging from the deal’s debt leverage, which they believe could jeopardise the company’s future, to potential culture clashes with a new Indian owner. “Everyone is concerned about the [debt] issue,” says Yue Chunxue, chairman of the factory union.

The transaction’s defenders argue that the debt level is in keeping with previous leveraged buyouts in the sector. They also point out that the lenders involved –Standard Chartered, Deutsche Bank, Goldman Sachs and Morgan Stanley – have no recourse against Apollo and Cooper for five years even if they do struggle to repay their debts, giving the two parties time to marry Apollo’s presence in India, Africa and Europe with Cooper’s well-established manufacturing and distribution operations in the US and China.

Since selling its automotive business in 2004 to concentrate on tyres, Cooper has expanded aggressively overseas. In addition to the Shandong joint venture, it operates a wholly owned facility in Kunshan, Jiangsu province, that has not had any work stoppages since the Apollo transaction was announced. The two China plants are at the heart of an overseas manufacturing and distribution network that last year accounted for 30 per cent of Cooper’s total revenues and almost 40 per cent of group profits.

“With almost no overlap in geography and little overlap in product offerings, this pending merger allows for facilities to remain in operation, for workforces to be maintained and labour agreements to be honoured,” Cooper says. “It seems that some are looking past these benefits and overlooking the opportunity to create a new leader in the tyre industry with a very bright future.”

Chengshan management and the Chinese factory workers also worry about having to endure another bout of growing pains with a new Indian owner. “In China, India is still seen as a developing country and there might be certain undertones relating to that,” says Kamal Rungta at EJ McKay, a corporate advisory firm that focuses on India-China deals. “When you have an American or European company in control, they are associated with investment in new technology and so on.”

The Cooper-Apollo deal has similarly encountered labour hurdles in the US, where a recent arbitration ruling required the Indian company to reach an agreement with the United Steel Workers about its members’ concerns over job security and benefits. Those negotiations are continuing and Cooper has scheduled a shareholder vote on the transaction for next week.

In my view Cooper is the father and we are the son. But Cooper has failed in its duty as a father. We have changed the locks at the family home and we are not letting them back in

– Ma Rufu, worker and union member

The vote should sail through, with Apollo offering $35 for shares that were trading at less than $25. After initially approaching the offer price, the shares have fallen back below $30 as investors fret about Cooper’s ability to complete the transaction before a year-end deadline. Among those hoping to profit is US billionaire investor John Paulson, now Cooper’s largest single shareholder with a
7.7 per cent stake.

Cooper’s Shandong workforce says it will only relent if the transaction with Apollo is abandoned. And even if it is, the anger is such that it is unclear how Cooper would repair its relationship with Chengshan, which has asked a local court to dissolve the joint venture. The court recently dismissed an attempt by Cooper to have the dispute transferred to an arbitration panel in Hong Kong and is likely to rule on Chengshan’s petition in October.

“Cooper management hasn’t taken the interests of Chengshan or the workers into consideration,” Che Hongzhi, Chengshan chairman, said in an interview this week. “They don’t care if the joint venture lives or dies in future. They have only taken their own interests into consideration in deciding to sell the company.”

Cooper rejects that assertion. “We have attempted dialogue with the union, the joint-venture partner and the workers but have been ignored or rebuffed on multiple occasions,” the company says. It adds that Chengshan’s lawsuit is “without merit” and Cooper will “defend vigorously against it”.

Apollo says: “The strategic merits of Apollo’s combination with Cooper are clear. Apollo looks forward to working with Cooper and representatives from the Chengshan Group and the United Steel Workers to resolve these matters.”

In contrast to Cooper’s plant managers, Mr Che had no problems entering the factory in Rongcheng, a small coastal city on the tip of the Shandong peninsula, as he proudly gave the Financial Times a tour of the factory. The main receiving area for visitors includes a large bank of video screens, each showing a live shot of activities in different areas of the plant, and pictures of Chengshan officials receiving VIP dignitaries such as Zhang Gaoli, a member of the Chinese Communist party’s ruling Politburo Standing Committee, and former premier Li Peng.

“In my view Cooper is the father and we are the son,” says Ma Rufu, a 50-year-old worker and union member. “But Cooper has failed in its duty as a father, so we would rather sever the relationship. They are on the outside and we are inside. We have changed the locks at the family home and we are not letting them back in.”

According to Cooper’s Chinese union, in 2012 the joint venture reported more than $1.1bn in revenues and a pre-tax profit of $107m, accounting for more than a quarter of total group revenues and profits.

Mr Che says this performance was hard-earned. Formed in 2006, the joint venture struggled for four years as average annual profits fell from Rmb200m to Rmb140m and the two partners learnt to overcome their “cultural differences”. “At the time I told them, you wear western clothing, speak English and eat western food,” says Mr Che. “You have come to manage our local workers and interact with our clients, bankers and government officials but you don’t really communicate with them.”

Mr Che said he was first informed of Apollo’s “intention” to buy Cooper in May but was not given any details about the transaction. When the deal was formally announced on June 12, the workers reacted immediately. “We marched out of the factory at 1pm on June 12 and held a small protest,” says Mr Ma.

According to people involved in the deal, Roy Armes, Cooper’s chairman, was taken aback by the hostility he encountered when he travelled to Shandong a week later. As a result, it was decided that it would be unwise for Apollo’s chairman, Onkar Kanwar, to make a follow-up visit to the plant.

When subsequent talks between the union and Cooper representatives broke down, the workers went on strike. In an effort to limit the financial damage to Chengshan, given its 35 per cent stake in the operation, the workers agreed to return to the factory in August on the condition that they would produce only Chengshan-brand tyres while boycotting any work on Cooper tyres.

Things went more smoothly for Cooper and Apollo in Ohio, despite the United Steel Workers’ concerns about the transaction. “It’s a big change for us,” Rodney Nelson, head of USW Local 207, said last month. “There are a lot of anxieties about our future and the route that we’re going to be taking.”

A visit by Mr Kanwar allayed some of Mr Nelson’s concerns. “He told us of how he went to college and lived in Toledo, which is just up the I-75,” Mr Nelson added. “He seemed very sincere and confident in what they wanted to do. He told us that they planned on keeping the Cooper plants operating as they are today . . . They showed up with former Ohio governor Dick Celeste. That impressed me since he was a trusted government official.”

“We have issues but we’re looking at a resolution,” Mr Nelson continued. “We’re not disputing anything with Apollo. We’re going to work through our problems.”

In Shandong, attitudes continue to harden. “It’s no use talking to Apollo,” argues Mr Yue, the union boss. “They have always said they will pursue the deal to the end, so what’s there to talk about? If they want to say that they are willing to stop the deal, then we can talk.”

Additional reporting by Wan Li

The motives behind a blockbuster deal

Neeraj Kanwar, Apollo Tyre’s managing director, portrays his blockbuster $2.5bn attempt to acquire Cooper Tire as the result of a careful, decorous courtship, writes James Crabtree. The driving force behind the merger, he talks of the two companies becoming acquainted over many years before deciding to get hitched.

His father offers a slightly different view, describing a deal driven by vaulting ambition. “With a stroke of a pen, we have not only put Apollo on the world map, but also created a place in history,” Onkar Kanwar, the group patriarch and chairman, told India’s Outlook magazine. “Now, Antarctica will be the only continent where we won’t be selling tyres.”

Despite the family’s global aspirations, shareholders look set to lose out, a pattern familiar from other landmark Indian acquisitions. These include Tata’s $13bn purchase of steelmaker Corus in 2007, and a $6bn deal in the same year for Novelis of Canada by Aditya Birla, another large conglomerate. Both have been criticised for destroying shareholder value.

A senior figure at one of Apollo’s competitors in India says he understands Mr Kanwar’s approach. “I’d have liked to do this deal too, given it gives you a beachhead in both the US and China, which are crucial markets, and also a very strong brand,” he says. “So I do feel envious on the one side, but on the other hand I look at what he paid for it, which is almost certainly too high, and the amount of debt they are taking on. It looks as if Neeraj has taken on too much.”

Some observers see Mr Kanwar’s move as part of a trend of big deals in search of resources or brands. “A lot of what these Indian companies are trying to search for is scale,” says Rashesh Shah, chief executive of Edelweiss, a brokerage. “Making a large acquisition abroad leapfrogs this scale problem, given that India is still a relatively small economy, and it also has relatively small banks.”

Others have another opinion. “Sometimes I’m afraid ego does get the better of some of these guys,” says Pradip Shah, chairman of IndAsia Fund Advisors, a financial group, who cites potential accountability problems. “The directors on the board are either silent spectators or cheerleaders, and things with the top guy just get out of hand. Sadly, hubris is the result.”