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Chris DeMuth Jr. is the founder of Rangeley Capital LLC. Rangeley is an investment firm that focuses on event driven, value-oriented investment opportunities. Rangeley Capital and his value investing forum, Sifting the World (StW), search the world for misplaced bets. Rangeley exploits them for... More
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  • A Small Island Could Be A Big Problem For Cooper Tire 2 comments
    Sep 17, 2013 2:02 PM | about stocks: CTB

    Beautiful, sunny Mauritius

    We have written up our thesis that Apollo appears to want to close their acquisition of CTB and is likely to do so. However, if their preference changes, there is potentially a big problem with the ability of CTB to protect their rights under the merger agreement.

    CTB and Apollo are in discussions with the USW and are hopeful about maintaining their current deal's schedule. Both the buyer and seller are committed to the deal. As of today, there have been no efforts by the buyer regarding walking away or re-cutting the deal. Incidentally, we have communicated our opposition to accepting any re-cut deal. We are comfortable with the fundamental downside to CTB, so accept this deal or better but would not support a lower price.

    To better understand the impact of the labor dispute on the deal, I think the best place to start is with the underlying document. In this case, I am particularly focused on the Material Adverse Effect language.

    " Material Adverse Effect " means any fact, circumstance, event, change, effect or occurrence that (i) has had or would reasonably be expected to have a material adverse effect on the business, results of operations or financial condition of the Company, its Subsidiaries and Joint Ventures, taken as a whole, but will not include facts, circumstances, events, changes, effects or occurrences to the extent attributable to

    (NYSE:A) any changes in general United States or global economic conditions,

    (NYSE:B) any changes in conditions generally affecting the principal industries in which the Company and its Subsidiaries operate,

    (NYSE:C) any decline in the market price of the Shares (it being understood that the facts or occurrences giving rise to or contributing to a decline in the market price of the Shares may be deemed to constitute, or be taken into account in determining whether there has been or would reasonably be expected to be, a Material Adverse Effect),

    (NYSE:D) regulatory, legislative or political conditions or securities, credit, financial or other capital markets conditions, in each case, in the United States or any foreign jurisdiction,

    (NYSE:E) any failure, in and of itself, by the Company to meet any internal or published projections, forecasts, estimates or predictions in respect of revenues, earnings or other financial or operating metrics for any period (it being understood that the facts or occurrences giving rise to or contributing to such failure may be deemed to constitute, or be taken into account in determining whether there has been or would reasonably be expected to be, a Material Adverse Effect),

    (NYSE:F) the execution and delivery of this Agreement or the public announcement or pendency of the Merger or any of the other Transactions or the Financing, including the impact thereof on the relationships, contractual or otherwise, of the Company or any of its Subsidiaries with employees, labor unions, customers, suppliers or partners, and any litigation arising from allegations of any breach of fiduciary duty or violation of Law relating to this Agreement or the transactions contemplated by this Agreement, or compliance by the Company with the terms of this Agreement,

    (NYSE:G) the performance by the Company of its obligations under this Agreement, including any inaction in compliance with Section 5.1to the extent that such inaction is as a result of Parent unreasonably withholding its consent under Section 5.1

    (NYSE:H) any change in applicable Law or GAAP (or authoritative interpretations thereof),

    (NYSE:I) the outbreak or escalation of hostilities, any acts of war, sabotage or terrorism, or any escalation or worsening of any such acts of war, sabotage or terrorism, or

    (J) any hurricane, tornado, flood, earthquake or other natural disaster except in the case of clauses (A), (B), (D), (H), (I) or (J) to the extent such fact, circumstance, event, change, effect or occurrence has a disproportionate effect on the Company, any of its Subsidiaries or Joint Ventures, taken as a whole, relative to others in the industries, geographies or segments in which the Company, its Subsidiaries and Joint Ventures operate; or (ii) that would reasonably be expected to prevent or materially delay or impair the ability of the Company to perform its obligations under this Agreement or to consummate the Transactions. For the purposes of Section 7.2(c) , "Material Adverse Effect" shall exclude any fact, circumstance, event, change, effect or occurrence that is disclosed in the Company SEC Documents (excluding any disclosures set forth in any risk factors section or any disclosure of risks included in any "forward-looking statements" disclaimer to the extent that such disclosures are general in nature or cautionary, predictive or forward-looking in nature) filed or furnished since January 1, 2011 and publicly available prior to the date of this Agreement where the applicability of the disclosure in such Company SEC Document is reasonably apparent on its face.

    "(F)" carves this labor dispute out of the Material Adverse Effect definition, protecting the deal from the dispute. In and of itself, the labor dispute will not kill the deal. At the same time, it adds to the cumulative burden that the parties have to deal with in order to close. Here is one recent press summary that shows how hairy the deal has become:

    (click to enlarge)

    While the dispute will not kill the deal directly, if the USW secures a preliminary injunction (Pending:PI), then a closing condition will not have been met:

    (c) No Injunctions or Restraints. No Order or Law, entered, enacted, promulgated, enforced or issued by any Governmental Entity (collectively, "Restraints") shall be in effect restraining, prohibiting or otherwise preventing the consummation of the Merger; provided, however, that each of the parties to this Agreement shall have used its reasonable best efforts to prevent the entry of any such Restraints and to appeal as promptly as possible any such Restraints that may be entered to the extent required by and subject to Section 6.3.

    What does the union want? The USW wants to unionize CTB's Tupelo plant. If they can kill the deal, it will be a significant show of force. Both management and wages are unpopular. Unfortunately, CTB management at Tupelo has not helped matters so far. Can management smooth things over quickly? It is unclear. But the difficulties with the deal have grown.

    Here is the big problem: Mauritius. Apollo Tyres is not buying CTB. Instead, the plan is for a wholly owned arm of Apollo Mauritius Holdings to buy CTB at $35 a share. Neither Apollo Tyres or their wholly owned arm of Apollo Mauritius Holdings has any assets within the US. So, we can sue for specific performance, but it might be hard to collect. As a reminder, here's where we would be heading:

    (click to enlarge)

    It is a beautiful spot, really heaven on Earth… unless you're trying to collect on the $2.5 billion that they owe us. In practice, this could quickly become a question about the $112.5 reverse break-up fee and what percentage of that fee the wholly owned arm of Apollo Mauritius Holdings is willing to settle for. So what is going to happen? It probably comes down to whether or not Apollo ever wants to do business in the US. If yes, then they will go through with this. If no, then you can see them in court… in Mauritius.

    Disclosure: I am long CTB.

    Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital, a partnership that invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our partners, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.

    Stocks: CTB
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  • tuliptown
    , contributor
    Comments (1561) | Send Message
    Chris, if Apollo does not want to deal with the union, couldn't they just backout and cooper continue to run its tire business? Why does cooper have to sell?
    17 Sep 2013, 02:50 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (11140) | Send Message
    Author’s reply » Yes. That is one possible outcome.
    17 Sep 2013, 03:17 PM Reply Like
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