Schaeffler Group is likely to wait until 2010 before it takes full control of Continental AG, German radio station NDR1 reported on July 16, just a day after Continental rejected the smaller company’s $17.7 billion takeover run.
The report, which didn’t cite any sources, suggests that Schaeffler will wait until the lion’s share of the loan arrangement Conti racked up to finance the Siemens VDO acquisition expires. According to the report, this would also mean Schaeffler would have to re-negotiate conditions before the loans expire, and, in the current conditions, would not get such a good deal.
The German radio report was aired the same day that financial analysts at Morgan Stanley published an investor note suggesting “a takeover bid meant to fail could push the share price higher for the next 30 days.” The Morgan Stanley analysts point out that, in their opinion, a full takeover of Conti does not appear “financially feasible.” However, the takeover bid should clearly add strong support to the share price in the short term, the analysts conclude.
The most disputed part of Schaeffler’s takeover approach to date has been whether or not the company properly followed shareholding disclosure rules. Now, it appears that this may have prompted the German government to change reporting rules. According to a Reuters report, “If Schaeffler had used a legal loophole to covertly gain control over a 36 percent stake in the tires-to-brakes maker, the government would act rapidly to close it.” This could happen as soon as January 2009.
Continental sharply rejected a $110 (69.37 euros) per share cash takeover offer from Schaeffler, describing it as an “opportunistic approach [that] does not reflect the full value of the company.”
The statement said the offer has “no convincing strategic rationale for a business combination” and that “Schaeffler is trying to achieve control over Continental in an unlawful manner.”
For the first time, Continental lent its support to claims that Schaeffler already indirectly controls roughly a third of the company: “According to our analysis, the Schaeffler Group has secured access to 36 percent of the outstanding capital of Continental in an unlawful manner – with the help of derivative positions and collaborating banks. This would result in a comfortable voting majority at the shareholders meeting and may even lead to a qualified voting majority.”
According to the Financial Times, Schaeffler holds 2.97 percent of Continental’s stock directly and has amassed the right to own an additional 32.95 percent stake through various options. All of which begs the question, how can Continental fight off what is rapidly becoming the largest hostile takeover bid in Europe this year?
Despite press speculation that the potential takeover may result in the divestment of the tire business, Schaeffler Group President and CEO Jurgen Geilsinger said the group’s focus is on combining the strengths of the two companies: “Schaeffler expressly supports the strategy of Continental including its tire business.” His statement continued: “Schaeffler will not break up Continental AG. The company will continue to be listed on the stock exchange and, if possible, remain in the DAX index. Continental will remain an independent company headquartered in Hanover. No jobs will be lost in conjunction with the transaction.”
Schaeffler’s suggestion that it will not divest Continental AG’s tire division, should the deal progress successfully, is supported by Morgan Stanley. Writing in an investor report dated July 15, the analysts explained that Continental’s “rubber” businesses were too valuable to sell off below true market value: “ContiTech and both tire businesses account for over a third of group revenue, but we estimate over two-thirds of group free cash flow…Selling Tech and Tires could sabotage the long-term debt reduction capacity of the group.” Deutsche Bank analysts agreed that a tire divestiture is unlikely, but with a different rationale: “…there are few potential buyers to buy assets (such as tires and ContiTech), limiting their potential value.”
Continental to fight ‘unlawful bid’
At the moment it appears that Continental’s key defense is a legal maneuver. According to reports, Conti’s chief executive Manfred Wennemer has written to Bafin, the German market watchdog, arguing that Schaeffler may have violated German financial law. This argument hinges on the suggestion that Schaeffler hadn’t properly disclosed the fact that it acquired a significant stake in their company. Schaeffler’s response is that it wasn’t required to disclose that it had gained control of more than 28 percent of Continental’s shares by entering into swap transactions, in addition to its 2.97 percent direct holding in the tire and automotive supplier. Bafin has launched an investigation.
For its part, the executive board of Continental says it was willing to support a financial investment of 20 percent in the company. However, the Schaeffler Group insisted on a controlling a more aggressive stake of more than 30 percent.
“The strategic benefits of a closer collaboration of both companies are very limited. Schaeffler would benefit from Continental, but Continental not from Schaeffler. Continental has an outstanding potential as a standalone company in its current form,” Continental’s strongly worded statement read.
Geilsinger has the opposite opinion: “Schaeffler’s strengths are in the fields of mechanical, mechatronic and precision components for engines (powertrain), transmissions and chassis. Continental’s strengths are in the fields of electronic and software systems for engines, chassis and interiors…The expansion of joint, coordinated projects will…enable the two companies to profit to an even greater extent from core areas of future development of the automotive industry like the ‘energy-efficient car of the future.’”
Morgan Stanley analysts described Schaeffler as more of a financial buyer than strategic “given the lack of similarities in their business activities.” (Courtesy of Tire Review/Tyres & Accessories)
