Schaeffler/Conti Saga – ‘Over By Christmas’?

The announcement had a phenomenal response at the stock market where, following publication of Schaeffler’s statement on EU approval, tendered shares in Continental grew by as much as 50 per cent before levelling off at around 36 per cent up, in response. Why? Because up to this point investors had become decidedly nervous about Schaeffler’s ability to complete the deal and the EU announcement was seen as a sign that the deal as a whole is on track. Due to the well-documented contraction in credit markets bankers had been scratching their heads about where the necessary financing would come from and whether the supporting banks would be able to come up with cash.

In addition the fact that Schaeffler ended up indirectly holding double the stake it had agreed to buy fuelled rumours that Schaeffler would in some way be forced to sell the rubber business. This in turn led to speculation that any one of a number of premium manufacturers, investment banks or sovereign wealth funds would lighten Schaeffler’s load by buying up to half its allowed shareholding (25 per cent of the Conti); purchase the so-called rubber unit; or take control of the shareholding Schaeffler is left with over and above its 49.99 per cent allowance.

Schaeffler’s tone on a possible break-up is changing At this point it is worth mentioning that whatever happens on or around 19 December, Continental’s owners-in-waiting have made it clear from the start that Continental AG will remain an independent company based in Hanover. As it stands the two entities remain completely separate, with the management of each legally responsible for ensuring that any future moves are in the best interests of their own company. Does this mean the tyre business will not be sold? The truth is no-one can definitively rule this in or out at the moment. However there are signs that the language Schaeffler is using on this subject is evolving. Six months ago, at the start of takeover proceedings, Schaeffler’s press statements were categoric: “Continental AG will remain an independent company based in Hanover. Schaeffler will not cause a break up of Continental AG or a sale of the tyre business. Continental AG will continue to be listed on the stock exchange, if possible in the DAX. There will be no transfer or reduction in jobs resulting from the takeover offer.”

By the 31 October, in a release on the sale of its Lacey Manufacturing Inc. surgical equipment subsidiary, Schaeffler publicly stated that the group is focusing on its core business. This is interesting because in Schaeffler’s EU clearance statement president and CEO Dr Jürgen Geißinger used the same definition of what constituted the company’s core business when he said Schaeffler would aim to combine the two companies’ strengths in “mechanical, mechatronic and precision components for engines, transmissions and chassis with Conti’s strengths in electronic, software and system solutions for engines, chassis and the passenger compartment.” The statement was clear that the goal is for the two companies to work together so Schaeffler and Continental can “develop systems for reduced fuel consumption such as hybrid and electrical drives.” In both instances any mention of tyres being one of Continental’s strengths or “core business” was noticeable by its absence. Whatever happens when the EU commission gives its official takeover verdict on or around 19 December, Continental’s tyre business continues to be one of the most profitable parts of the group.

In addition the strength of the company’s tyre replacement sales provide welcome shelter for a business that would otherwise be particularly exposed to difficulties associated with the slowdown of vehicle manufacturing output. As one Continental manager told Tyres & Accessories, Continental did good business selling tyres yesterday, is still doing it today and will continue to do it tomorrow whatever the financial details of the ownership arrangement are. So, while the EU Commission’s decision will give legal clarity to the ownership of Continental AG and force Schaeffler to play its hand regarding its excess shareholding position (or else refinance the 10 billion euros worth of loans Conti took out to buy Siemens VDO in 2007 at the depths of a credit crunch) there won’t be any overnight changes in a process that is likely to take two or three years to complete. Or, to quote the military saying: “It is always over by Christmas, except that it never is.