Will Credit Crunch Affect Conti/Schaeffler Deal?

After days of speculation that Michelin may be interested in bidding for Continental AG’s rubber division, the Financial Times has suggested that Bridgestone of Japan “is likely to be a willing buyer.” The Michelin rumours began after the French tyre manufacturer’s managing partner, Michel Rollier, gave interviews to various publications indicating that the company would be interested in bidding for Conti despite the likely cartel implications. The reasons for Bridgestone’s name being linked with a potential Continental rubber acquisition, on the other hand, are to more to do with the company’s lack of comment combined with the free fall of financial markets.

According to the Financial Times, hedge funds associated with Schaeffler’s takeover of Continental are “becoming increasingly nervous about the potential 12 billion (£9.4 billion) deal closing.” The problem is that the recent almost unprecedented falls in stock prices in markets across Europe and the world have affected the deal’s value. When Schaeffler offered 75 euro per Conti share in the summer, it received an unexpectedly high take up. However, on Friday 3 October the Conti shares were trading at 66 euros.

It all comes back to the credit crunch because, Schaeffler set up a 16.5 billion euro loan to finance the Continental deal, which in the given circumstances must be proving to be increasingly expensive. According to the Financial Times, another reason is because the hedge funds are “baffled as to why Schaeffler hasn’t yet applied to the European Commission for approval…in spite of the deadline for its tender offer having expired more than two weeks ago.” If antitrust approvals are not granted by early March, the whole deal could break down just as the Amtel-Vredestein/Sibur acquisition did at the end of September.

All this is leading some industry observers to speculate the Continental should commit to sell its crown jewels, the tyre and rubber division. Michel Rollier appears to loosely ruled Michelin in. Bridgestone, as suggested by the Financial Times, have yet to rule the Japanese manufacturer out. For Schaeffler, “such a move would help offset the risk of holding a stake in such a leveraged company, which is deteriorating by the day,” FT suggested.