Analysts: Conti Merger Saga 'Turning a Corner'

Morgan Stanley analysts have described Conti's recent share issue as a “very significant” move forward in an investor's note dated 8 January. “We think Conti's latest recapitalization effort is positive for four main reasons: it enables the forward start on the 2010 debt maturities… the 35 euros price was a smaller discount than… expected; [it] increases free float to 25 per cent from 11 per cent and helps stabilize the company's image in the marketplace which reduces the risk to the underlying business.” While they conceded that this final point is “intangible,” the analysts report that the share offer addresses a key concern “that Conti's winning culture and ability to retain existing contracts, attract new business and new human talent was threatened by an unstable financial future.” In this regard, we think Conti is turning the corner.

Rating the company as equal weight, Morgan Stanley explained that its analysts wouldn’t make a higher conviction recommendation until they know more details about Continental’s strategic, operational, financial and structural co-operation with Schaeffler. “From this perspective, there are just too many unknowns at present for us to make a high conviction directional (or even relative) recommendation on the shares,” the analysts reported.

Meanwhile in a stock exchange filing, Continental AG reaffirmed its plans to merge with controlling shareholder Schaeffler Group “in the medium term.” However, according to the exchange filing, the two companies haven’t set firm plans on the timescale of the merger. Other news sources reported that the move won’t come this year. Bloomberg reports that the two companies’ combination would ensure they had an investment grade debt rating. Currently Continental’s debt is rated B+ at Standard & Poor’s and Fitch Ratings, four levels below investment grade.