Half of Continental’s supervisory board hails from unions that favor a capital increase to safeguard the company’s survival. The 20-member board meets in Hanover, Germany, today to decide whether to remain apart from Schaeffler or combine operations amid the worst auto slump since World War II.
“It’ll be difficult for Schaeffler to secure a majority,” said Hans-Peter Wodniok, an analyst at Fairesearch in Frankfurt. “The workers will most certainly vote against Schaeffler and therefore for a capital increase. Continental will face enormous financial problems if it doesn’t succeed.”
Continental, also Europe’s second-largest tiremaker, needs fresh funding to meet 4.2 billion euros in loan payments due over the next 13 months. Shareholders have already given authorization to issue 58.6 million new shares that would raise as much as 1.5 billion euros at current prices.
Schaeffler, with only five board seats, is also opposed by a group of lenders which holds 50% of Continental debt and is pressing for the capital increase, three people familiar with the situation said. They declined to be identified because the talks are private.
Schaeffler’s Challenge
Schaeffler racked up 11 billion euros of debt from buying Continental as it sought to challenge Robert Bosch GmbH as the biggest auto components supplier. Pushing back a merger would be a blow to the ball-bearing maker’s ambitions as it seeks to cut labor costs by 250 million euros this year to soften the effects of an anticipated 15% drop in revenue.
After a share sale, Schaeffler’s stake may be diluted from the current 90% to as low as 66%. The family-owned company’s votes in Continental are already limited to less than 50% by the takeover agreement.
During the meeting at Continental’s headquarters, directors probably will commit to a course for the company. The options are supporting a merger or calling for the manufacturers to operate separately, the people said.
Antje Lewe, a spokeswoman for Continental, and Schaeffler’s Detlef Sieverdingbeck declined to comment before the meeting.
‘Zero Sense’
With a combined 22 billion euros in debt, financing a merger may not be feasible, said Michael Tyndall, an analyst with Nomura Securities in London. “The idea of the merger makes zero sense and doesn’t look like it’s on the table anymore.”
Continental needs to finance debt payments of 800 million euros next month and 3.5 billion euros in August 2010. The company today reported a second-quarter net loss of 189.8 million euros, its third consecutive deficit, as sales slumped 28%.
Costs will rise for the remainder of this year, offsetting a “continuing revival in sales and operating results,” because of spending on shutting plants to reduce capacity, Continental said. Following the August debt payment, the company will try to keep cash levels “stable” through the end of 2009, it said. Liquidity at the end of the quarter totaled 4 billion euros.
Continental rose as much as 40 cents, or 1.6%, to 26.11 euros and was up 1.3% as of 9:24 a.m. in Frankfurt trading. Schaeffler is closely held.
Casting Vote
Schaeffler’s appointees on Continental’s board include Chairman Rolf Koerfer, a partner at Allen & Overy LLP, the law firm that represents the Herzogenaurach, Germany-based company. Koerfer could cast a deciding vote if the sides are deadlocked.
The other Schaeffler representatives are CEO Juergen Geissinger, CFO Klaus Rosenfeld, and the two owners: the founder’s widow, Maria- Elisabeth Schaeffler, and their son Georg.
Continental CEO Karl-Thomas Neumann said on July 20 that he expects the board to make “clear, direction-setting decisions” at the meeting to address the company’s “paralysis due to its uncertain future.”
Neumann said on April 23 that Continental is considering the sale of stock as well as divestments to raise cash for upcoming debt payments.
Schaeffler, which makes transmission parts and ball bearings for cars, planes, and windmills, wants more time to reach an agreement with banks, as it continues to pursue a merger with Continental, CEO Geissinger said in a July 16 interview with Bloomberg.
Hostile Approach
Schaeffler paid 75 euros a share for 90.2% of Continental’s stock after a hostile approach made just as financial markets collapsed last year. A takeover agreement that runs at least until spring 2014 limits Schaeffler’s direct ownership of Continental to 49.9%, with banks holding another 40.3% on its behalf.
Commerzbank AG, Royal Bank of Scotland Group Plc, UBS AG, Landesbank Baden-Wuerttemberg and UniCredit SpA’s HVB Group unit financed Schaeffler’s purchase of Continental, which was completed in January.
Moody’s Investors Service cut its rating on Continental’s debt, already two steps below investment grade, by one level to Ba3 on June 2, citing the “severe downturn in global automotive markets” and “uncertainty” over the manufacturer’s relationship with Schaeffler. Moody’s may lower the rating further, the credit-reporting company said at the time. (Tire Review/Akron)
