Will Conti Be its Own White Knight?

Speculation about the future of Continental AG ranges from those that see the Schaeffler bid as a done deal, to optimists that believe Conti will be able to fight its corner and hold on to overall control. So what options are available to executives in Hanover? And could Continental come to its own rescue?

Raising the overall Conti stock price is likely to be the primary defence. On this note, sources “close to the matter” told Thomson Financial News that Continental is considering raising fresh capital with the aim of diluting the number of shares Schaeffler owns. Some analysts are speculating that Continental will try to find an investor to counter Schaeffler’s bid, a move that would have the secondary effect of raising Continental’s share price. Another suggestion is that Continental could sell off its ContiTech division and buy back shares for some 2 billion euros, analysts at Chevreux mooted. “First of all, the company has now very limited downside as the share price should not go below 70 euros. That is clearly an asset in these days,” Equinet analyst Tim Schuldt said.

Would Schaeffler spin off the rubber business anyway?

If Continental might be considering a divestiture anyway, what would Schaeffler Group do following a successful bid for Continental AG? Financial analysts are divided about whether this would result in the new owners spinning-off the tyre and rubber divisions. However, there is a consensus among sources that the group’s softly, softly approach is the opening gambit of Porsche/VW-style takeover strategy. “The current, unattractive takeover offer (by Schaeffler), in our view, serves to let Continental’s share price cool down, to then step-by-step build up larger holdings,” NordLB analyst Frank Schwope told TradingMarkets.com.

Despite assurances from Schaeffler Group President and CEO Dr Jürgen Geißinger that it will not break up the company in the event of a successful bid, some analysts continue to speculate that divestitures are to be expected. NordLB suggested that it is likely Schaeffler already has a buyer at hand for Continental’s tyre divisions. Sal. Oppenheim market watchers estimated the enterprise value of the passenger and light-truck tyre division to be around 6.5 billion euros, although other estimates put the price tag at up to 10 million euros. Pirelli, Bridgestone and Yokohama have all been named as potential suitors.

However, other sources have suggested that divestitures don’t make economic sense. Writing in an investor report dated 15 July, MorganStanley analysts explained that Continental’s so-called rubber businesses were too valuable to sell off below true market value: “ContiTech and both tyre businesses account for over a third of group revenue, but we estimate over two-thirds of group free cash flow…Selling Tech and Tyres could sabotage the long-term debt reduction capacity of the group.” Deutsche Bank analysts agreed that a tyre divestiture is unlikely, but with a different rationale: “…there are few potential buyers to buy assets (such as tyres and ContiTech), limiting their potential value.”