Conti Concludes “Far Reaching” Agreement with Schaeffler

After more than a month of talks and controversy, on August 21 Continental AG announced it has entered into what it calls a ‘far reaching investment agreement’ with Schaeffler KG, Mrs. Maria-Elisabeth Schaeffler and Mr. Georg F.W. Schaeffler. The agreed upon deal sees Schaeffler increase its offer to 75 euros per Conti share, however this “new chapter in its Corporate history”, to quote Continental, will be one without CEO Manfred Wennemer; Mr. Wennemer has asked the Conti supervisory board to release him from his responsibilities by August 31, 2008. The supervisory board has agreed to this request, noting great respect for Wennemer’s achievements. His successor will be appointed in the immediate future.

This agreement brings a settlement to the dispute surrounding the public takeover offer launched by the family owned business, and during the agreement process former German Chancellor Dr. Gerhard Schröder will act as a guarantor for ensuring the interests of all Continental stakeholders. The two parties have agreed upon an obligation on the part of Schaeffler to compensate for possible negative impacts upon Continental; further details are given below. Importantly, Continental believes the agreement will allow it to remain a “reliable long-term partner” to its customers, one that is “extremely well positioned.” Conti adds that its employees can continue to rely upon its focus for the future that is has developed over the preceding years.

The open-ended investment agreement, which cannot be terminated by either party before the spring of 2014, contains several provisions to safeguard the interests of Continental AG, its shareholders, employees and customers. As previously stated, Schaeffler KG has committed itself to increase the offer price per Continental share from 70.12 to 75.00 euros. Such an increase corresponds to an additional sum of around 800 million euros for Conti’s shareholders, representing a premium of 39 per cent on the stock price per Continental share immediately prior to announcement of the takeover bid, 20 per cent on the monthly average price and 8 per cent on the three month average price prior to announcement of the planned takeover bid. Shareholders most likely have until September 16, 2008 to decide whether to accept the latest offer.

In addition, Schaeffler has undertaken to limit its position to a minority shareholding in Continental AG, up to 49.99 per cent, for a period of four years. Continental says this measure has been agreed upon in order to support the ongoing strategy and business policies of its management board while maintaining its current market and brand appearance, and so as to not demand a sale of activities or seek other material structural measures.

A further material element of the agreement directed at safeguarding the interests of Continental AG is, as touched upon earlier, the obligation of Schaeffler to compensate Continental for possible negative effects resulting from a so called change-of-control in connection with Conti’s existing financing agreements and negative tax effects resulting from Schaeffler’s shareholding. This compensation comes in the overall amount of 522 million euros.

Schaeffler KG further has accepted to give, in case of a possible sale of blocks of its minority stake in Continental within the next four years, a pre-emptive right to a person nominated by the guarantor, if the sale to such person is in the best interest of Continental AG and Schaeffler KG. In addition, it has been agreed that there will be no changes to Continental AG’s form of incorporation, its corporate seat, headquarters or business divisions, its listing on the stock exchange, its dividend policy or an increase of its debt to equity ratio should any of these be against Continental’s wishes.

To safeguard the interests of the employees, Schaeffler KG is obliged not to conduct or support, without the consent of Continental’s executive board, any measures directed at changing existing collective bargaining or works council agreements or abolishing the employees’ codetermination rights based on parity in the supervisory board. In addition, Schaeffler is obliged to respect all rights belonging to employees, works councils and labour unions under applicable law, agreements, regulations and contracts in force at Continental.

In addition, Conti reports that both parties will examine, without undue delay after completion of the takeover offer, the possibilities for strategic cooperation projects between the Schaeffler Group and the Continental Group, particularly in the Powertrain division. Such cooperation would be based on the principles of an alliance of equals between two productive and independent companies.

As a guarantor for ensuring the interests of Continental, its shareholders, its employees and other stakeholders, former Chancellor Dr. Gerhard Schröder is authorised and empowered to enforce Schaeffler’s obligations at any time by legal action or out of court. In this regard he is entitled to request information from Schaeffler about their level of compliance with their obligations under the Investment agreement.

Upon announcing the agreement, Continental admits that both itself and Schaeffler handled the recent dispute “determinedly,” adding that “Continental (now) expects a smooth cooperation with the Schaeffler Group on the basis of the jointly reached investment agreement. It is the mutual goal to increase the value of Continental sustainably and on a long-term basis and to further develop Continental and increase its innovative strength with all energy – in the interest of all stakeholders of Continental.”