Are We Witnessing a Conti/Schaeffler U-turn?

There is no question that Schaeffler desperately needs to save money. In the first quarter of 2009, the company’s Automotive division recorded a downturn of 33 per cent compared to the previous year, which is now said to have “stabilized” at 25 per cent below last year, while its Industrial division is down around 40 per cent. However, lost sales don’t just mean reduced income. With output not expected to return to 2008 levels for another four years, the company has announced that it has to cut German labour costs by 250 million euros (the equivalent of 4500 jobs). Schaeffler has already cut 5,000 jobs in other countries, but redundancies at home make the automotive supplier very unpopular with the only people who are now realistically likely to help – the state and federal governments.

Tyres & Accessories understands that Continental’s supervisory board is giving this scenario serious consideration. However, while the company’s press office acknowledged the reports, officially company representatives described them as “just speculation,” adding that Continental was considering all options and would do whatever is best for the company. Now all eyes will be on the presentation of Continental’s new strategy, which executive board chairman Dr. Karl-Thomas Neumann is expected to present alongside the company’s second quarter results at the end of July. So while Schaeffler needs the reverse takeover (or something similarly radical) to work and Continental’s supporters are likely to relish the prospect of regaining control, not everyone sees the long-term benefit of merging the two companies.

In an investor’s note subtitled “A New Life With(out) Schaeffler” and published on 20 May, Morgan Stanley analysts said Continental has to prioritise taking steps to minimise the liabilities attached to Schaeffler. “We believe each month Conti must contend with [Schaeffler’s] 11 billion euros of debt adds incremental pressure to its operating business and could threaten the company’s winning culture,” the analyst explained, pointing out that they support a combination with Schaeffler as long as it improves Conti’s financial strength and independence. However, there are also still question marks over the extent to which the two companies can benefit from their dysfunctional strategic alliance. As the world’s second largest auto supplier, Morgan Stanley highlights that Continental is already in a position of play the “economies of scale” card when it comes to purchasing and pricing power. Conti and Schaeffler may have found three-digit millions in annual synergy benefits, but even the prospect of 150 million euros of savings has to be balanced against risks associated with the merger. Assuming the two companies do successfully re-merge, it could put the job haemorrhaging happening in Germany on pause, but it is also likely to result in significant hits to the personal stakes of the Schaeffler family and still further recapitalisation and financial restructuring at the combined company.

And in the present economic climate this always runs the risk of opening yet another can of financial worms.