The mooted reversal of roles between Continental and Schaeffler in Germany last week takes the two companies a big step closer towards resolving the huge debt overhang (totally €23bn) of the two suppliers. SupplierBusiness reports.
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If Continental acquires Schaeffler, Continental AG, as a quoted company, is more plausibly in a position to raise additional capital needed to put the Conti-Schaeffler combination on a sounder footing.
But it is still difficult to see how the deal can be structured in a way that will allow the Schaeffler family to reverse out of their overambitious bid for Continental with a significant asset. The Schaeffler group is at or beyond the limits of its ability to maintain payment of interest on the debt it took on to acquire its 90% stake in Continental. The viciousness of the current downturn plunged almost all automotive suppliers into loss in the first quarter of 2009. In theory, the banks could just call in their loans, takeover the businesses and sell through the assets (including the shares in Continental). But that may not allow the banks to extract as much value, given that the Continental shares are weighed down by the uncertainty over the group’s future and the overhang of Schaeffler’s holding, as well as Continental’s own debts incurred in buying Siemens VDO in 2006. The abnormal current situation may offer a window in which they can be given a break by the creditor banks, which include state dominated institutions such as Commerzbank and RBS.
The four German states with substantial employment at stake — led by the Lower Saxony Prime Minister, Christian Wulff, don’t want two pillars of the German auto industry to collapse in the run-up to a national election. Reversing the leadership on the deal allows them more freedom to support the two companies without being seen as rewarding a chancy gamble by German billionaires (although whether enough freedom to make a difference is still uncertain), who are interested in achieving the results soon. Even the German OEMs may chip in with some breaks for the new group, given the strategic importance of Continental and Schaeffler in maintaining competition in critical areas of technological innovations such as engine management and safety systems.
Germany needs this structural challenge for two of its most important automotive suppliers to be addressed. Any deal in the next month integrating the two companies is likely to be just a first step, to be followed by recapitalisation and dilution of the Schaeffler family shareholding. Although presumably by acceding to Continental leadership, the Schaeffler family is buying time for a recovery in Continental’s share price that will allow them to exit with considerably more value than they have in hand at the moment.
Wulff suggested to the German business daily Handelsblatt in an interview published on 21st May that the talk by Conti CEO Karl-Thomas Neumann at the annual shareholders meeting on 23rd April of the presentation of a concept for integrating the groups within 100 days had already driven the Conti share price up from €13.5 to €20 – and that an integration of the two groups could raise that to “at least €50 or €60”. That would certainly make the situation much more easily resolvable – but may be over-optimistic – Conti’s share price rise since 23rd April has at least as much to do with stabilisation of the global economy as it has to do with a conviction that Conti-Schaeffler itself is turning a corner.
This article was provided by SupplierBusiness
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