IN DEPTH: Increasing Schaeffler hold on Conti unstoppable - analyst
Though Continental has rejected the takeover bid launched by bearing manufacturer Schaeffler, with Continental CEO Manfred Wennemer describing the takeover attempt as "unlawful" and "highly opportunistic" and the offer of EUR69.37 per share far too low, there is no way to stop Schaeffler buying shares on the open market or doing deals with major institutional shareholders to increase influence, a Global Insight research note said on Wednesday.
Analyst Tim Urquhart said the smaller company "does not need to affect a full takeover to exert sizeable influence on Continental" as its target prepares for major shifts in the demographics of the global vehicle market by enhancing its small passenger car tyre production capacity in the United States.
Noting that Wennemer has said there would be no more discussions with Schaeffler unless the company substantially improved its initial offer of EUR69.37 per share, Urquhart wrote: "It would appear that there is some substance to Wennemer's stance as Continental's share price on the open market rose to just under EUR74 on the open market on Wednesday."
He also said Continental was continuing to work on future product and production strategies despite the distraction to ensure it is ready to respond to major changes to future trends in the global light vehicle market. This includes investing US$60m in moving some of its passenger car tyre production from western Europe to the United States to cut production costs, improve Continental's ability to counter the weakness of the dollar and increase the production capacity of small and medium production car tyres in the United States at a time when sales of these segments are increasing as a result of high fuel prices.
"Many observers believe that there is little that Continental's management can do to rebuff Schaeffler's bid to launch a takeover of one of Europe's largest automotive components players," Urquhart said.
"It is unlikely that there are many other suitable rival bidders to kick off a bidding war or allow Continental's management to form a strategic alliance to stave off Schaeffler's advances.
"Continental could try to bring in another minority investor to dilute Schaeffler's control, but under German law it would need the approval of its own shareholders to take such action. So it appears the way is clear for Schaeffler to push ahead to increase its influence on Continental.
"Following Continental's EUR11.4bn acquisition of Siemens' VDO unit by Continental in 2007, the value of Continental's shares has slumped by 50% during the past year, reflecting rising raw material costs and the pressures facing automotive-related businesses arising from the current economic downturn and Schaeffler is taking advantage of this low share price to mount its takeover attempt."
He added that Continental's management was likely quite concerned that Schaeffler is following the private equity investment model by financing a leveraged buyout through selling off Continental's assets.
"Schaeffler could help finance its bid by selling Continental's ContiTech division and its tyre division," Urquhart said.
Meanwhile, Thomson Financial, citing the Frankfurter Allgemeine Zeitung, reported on Wednesday that Schaeffler Group was planning a full take over and planned to buy more shares during coming stock market lows.
"Sources familiar with the plans told the paper Schaeffler had always pursued a long-term plan that factored in Continental's rejection of its bid for all shares at EUR69.37 each in cash.
The reports said Schaeffler directly owns 2.97% of Continental's shares, is entitled via financial instruments to a further 4.95% and had also agreed to swap transactions relating to about 28% of Continental's shares but this stake-building went unnoticed until the approach to Continental's management last Friday.
The reports also said Schaeffler expects Continental and other automotive stock to remain under pressure in the near future from slow US car demand and high raw materials and energy prices.
They added that, though Schaeffler had said it targeted a holding of over 30% in Continental, analysts and Continental's management expected Schaeffler to take a larger stake later on.