Though Schaeffler’s offer of EUR70.12 per share is below Continental’s current share price of around EUR72, the offer could lead to a ‘creeping takeover’ similar to that of Porsche/VW, Global Insight auto analyst Paul Newton said in a research note on Thursday.
Go deeper with GlobalData
He noted Continental today reported a drop in its second-quarter net profit as it continues to integrate the purchase of VDO, but has reiterated its full-year guidance, despite recognising that tough conditions lie ahead for the rest of the year.
“Schaeffler looks to be in a strong position to take over Continental, but it has issued reassurances to the board, saying that it aims to retain the existing members, seeking only an ‘appropriate’ number of board seats. Still, if the takeover is successful, it will leave the resulting company with a mountain of debt to fund in a worsening climate in many of the mature markets on which Continental is reliant,” Newton wrote.
He said Schaeffler has arranged to secure around 36% of Continental’s stock through a series of swaps, organised by the Royal Bank of Scotland and UBS, and is now well positioned to win control of its bigger rival.
Schaeffler has said it aims to keep all of the company’s existing board members in place after its takeover of the firm and would be happy “if all present members of the board kept their positions” after a takeover.
Newton said Schaeffler’s move has been likened to Porsche’s takeover of Volkswagen as Continental is three times the size of the privately held Schaeffler Group.
Porsche bought a 30% stake in VW, then made a token takeover bid well below the market share value, which was not accepted, and it is now creeping towards majority control of over 50%.
Continental has asked German financial watchdog BaFin to investigate Schaeffler’s tactics, and the regulator is continuing to probe the deals that amount to options set up for Schaeffler.
Newton noted that Continental released a statement yesterday in which it cited “a comprehensive expert report” in which “Professor Dr. Mathias Habersack from the Eberhard Karls University in Tuebingen…designated the methods used by the Schaeffler Group, namely the entering into swap agreements, as a clear infringement of the reporting and notification provisions of the German Securities Trading Act and Securities Acquisition and Takeover Act.” Continental and Professor Habersack said: “BaFin can and must issue directives to not only nullify the illegal actions that are so damaging to the market, but also prevent the Schaeffler Group reaping the benefits of its illegal methods.”
“Despite the issuance of assurances from Schaeffler that it would retain all the current board members, it would be difficult to see how CEO Manfred Wennemar could stay in charge given his vehement and vocal disapproval of the bid,” Newton said.
“If the takeover were to go ahead, it would be the biggest such deal in the history of the automotive supply industry and would create the world’s third-largest auto supplier. However, it would also saddle the resulting company with a huge amount of debt, acquired through Schaeffler’s syndicated EUR11.3bn loan backing the bid, added to the EUR11bn loan used by Continental to purchase VDO from Siemens last year.
“The servicing of such a debt would be a concern for the future of the company, and it has also cast suspicions over Schaeffler’s intentions.
“Many observers believe that it may sell off parts of Continental, such as the tyre-making division, to pay down the debt.
“As things stand, Continental is still in the process of digesting the purchase of VDO and integrating its operations. Nevertheless, Schaeffler’s business is complementary for the most part to Continental’s, so keeping the company intact is also a possibility.”
