Cooper, Chengshan Group, union sign agreement

ERJ staff report (RN)

Findlay, Ohio − Cooper Tire & Rubber Co. has signed an agreement with Chengshan Group Co. Ltd. and the labour union representing workers at the companies' Cooper Chengshan (Shandong) Tire Co. Ltd. (CCT) joint venture, reported William Schertz for Rubber News.

During a 31 January investor conference call, Findlay-based Cooper said the agreement establishes a formal process for determining the future ownership of CCT and resolving other key issues.

As part of the agreement, Cooper and Chengshan will engage a yet-to-be-named independent valuation firm to determine the fair market value of the joint venture.

Once a valuation is established, Cooper said Chengshan will have 45 days either to purchase Cooper's 65 percent stake in the company or sell its own 35 percent interest to Cooper. Should Chengshan decide not to exercise either option, Cooper has the right under the agreement to purchase Chengshan's share.

A floor value of $435m (€322m) has been set for the business, and the price of the options will be based on the higher of either the floor amount or the value determined by the independent valuation firm, Cooper CFO Brad Hughes told investors during the call.

In the event that neither Cooper nor Chengshan elect to purchase the others' interest in the joint venture, the agreement allows for it to continue under its existing structure. As the agreement is only a framework, both parties still would be able to negotiate other arrangements that would settle ownership in a different manner, according to Cooper Chairman, President and CEO Roy Armes.

"As you know, this has been our No. 1 priority coming out of our now-terminated merger agreement with Apollo Tyres," Armes said, noting that the agreement "provides for a level of certainty for Cooper" and resolves several major issues.

The agreement allows for sustained normal operations at CCT, including the production of Cooper products and access to financial and operational data that will allow Cooper to resume financial reporting.

Hughes told investors that the company anticipates it will report third quarter 2013 results by early March, with fourth quarter and full-year 2013 results coming by mid to late March. Specific dates have not yet been set.

Valuation is expected to be completed within 60 days of completion of Cooper 2013 financial results, or sometime in mid-May, Armes said.

Regarding whether or not Cooper would prefer to acquire Chengshan's share or sell its own, Armes said "under either scenario, Cooper has a wide range of options to pursue our goals for growing in the Chinese market."

Should Cooper sell its own stake in the company, it would receive a minimum of $283m (€209.5m), given the set floor price, or more depending on the fair market value. The agreement stipulates that under this scenario, Cooper will continue to have offtake rights, with CCT agreeing to produce Cooper-brand products − including truck and bus radial tires − for a minimum of three years.

Further, Cooper would not participate in sales through CCT distribution and would focus on growing its passenger tire sales through other channels while shifting passenger tire production to its wholly owned Cooper Kunshan Tire Co. Ltd. (CKT) subsidiary located in Kunshan, China.

Long-term implications of this scenario would include the expansion of Cooper's CKT operations to support sales in China, an increased focus on growing its distribution in the region and the flexibility to accelerate new sourcing options through acquisitions, offtake relationships or greenfield developments, Hughes said.

Should Cooper buy Chengshan's 35 percent interest in CCT, Cooper would pay at least $152m (€112.5m) in the deal. The purchase would solidify Cooper's global TBR tire supply and distribution of those tires in China. The purchase would serve as a catalyst to accelerate Cooper's growth plans in China and the development of its global TBR business, Hughes said.

He noted that Cooper's balance sheet is strong and "well-positioned to support the purchase" of Chengshan's share of CCT. In addition, Cooper has "full confidence in our ability to run manufacturing at CCT without the involvement of Chengshan," he added.