According to Russia’s Kommersant newspaper, Amtel-Vredestein (AV) managing director Alexei Gurin recently initiated discussions with Continental AG and the company could sell a majority stake to the German company as soon as spring 2007.

For its part AV confirmed it has held discussions with Continental “in relation to possible areas of cooperation in Russia.” A Continental spokesman at the company’s Hanover headquarters also confirmed that talks between the two companies had taken place.

However, the Russian-Dutch company played down Kommersant’s suggestions that the deal would likely be sealed by spring, saying: “These discussions are at an early stage and may or may not lead to any agreement.” Either way, in the last six months Continental board members have repeatedly told of their willingness to invest the burgeoning profits in strategic acquisitions.

In its most recent third-quarter results AV reported that its nine-month net loss had doubled to $22 million dollars. Continental, on the other hand, reported EBIT of 1.18 billion euros after three quarters. This would suggest that any deal between the two companies would help AV handle its financial problems.

Kommersant quoted a source close to the deal as saying that negotiations between the Alfa Group that represents AV’s major owners (founder Sudhir Gupta 30% share, Alfa Capital Holdings 25% and Temasek Investment Fund <10%) have already reached the final stage. According to the report, a Continental delegation inspected Amtel-Vredestein Russian facilities in late October and early November before travelling to Germany to continue negotiations.

Reports speculate that, taking AV’s debt problems into account, Continental is in a good position to offer a discounted price for the company. Industry sources suggest that the controlling share (roughly 65%) could be bought at between 20% and 30% under its market cost. On Nov. 19 Amtel-Vredestein shares were valued at $270 million, meaning the controlling share could be sold for as little as $96-$110 million.

The potential deal is only expected to cover AV’s tyre production facilities in Holland and Russia and the company’s Vredestein, Amtel and Maloya brands. Interestingly, Continental is said to be uninterested in the AV-TO retail business that Amtel has worked hard to develop recently and that sold about 15 million tyres in 2005. What does not come as a surprise is Kommersant’s report that the Amtel-Kuzbass chemical fibre factory AV just sold is of no interest to Continental. In fact the Russian newspaper suggests that this can be interpreted as an “indirect confirmation of the forthcoming deal.”

If the deal does go ahead as the reports suggest, Continental will likely be pleased to re-enter the Russian market that it was forced to retreat from at the end of 2004. Ending its problematic joint-venture with Moscow Tyre Plant (which was subsequently bought by Amtel-Vredestein in July 2007) cost Continental around 30 million euros (£20.7 million), so re-purchasing a tidied up plant via AV could also be seen as a kind of poetic justice.

It is also of strategic importance to Continental as competitors Michelin and Nokian could otherwise overtake the German company as far as establishing a market presence in Russia is concerned. According to Tyres & Accessories’ research, Amtel-Vredestein is the second largest Russian passenger car tyre manufacturer in terms of market share. AV’s Russian replacement market share grew six points from 14% to 20% between 2003 and 2005. During the same period Continental’s market share remained static at 3%.

Then there is the OE business. In the spring Volkswagen announced that it would build an assembly plant south of Moscow capable of producing 115,000 vehicles a year by 2009. If Continental was to buy Amtel-Vredestein the company’s relationship with the German carmaker is likely to give it a distinct advantage in the Russian OE market.

The conclusion of a deal between Amtel-Vredestein and Continental could also signal the end of company founder Sudhir Gupta’s relationship with the company. According to Kommersant he is not interested in the retention of his actions, since the package on offer to him does not give him control over the company.

According to the newspaper, another result of the transaction will be that some of Amtel-Vredestein’s top managers will have the opportunity to increase their stakes in the company; currently managing director Alexei Gurin owns 1%, for example). Furthermore, the report says they will also be able to keep the positions after the sale.