Siemens Energy sale good for Conti group spin off – Analysts

Following the reports that Continental is in talks to sell off various parts of its wider group, analysts have responded positively to Siemens’ recent sale of its Energy division, saying it is good for Conti.

Upgrading their rating to “buy”, Jefferies analysts said: “Siemen’s recent spin-off of Energy gives confidence that Conti’s share price will benefit from its planned spin-off of Vitesco as the combined market cap of Siemens and Energy was up 7 per cent on the day of transaction (DAX +3%)” The implication, they explained, was that there was a discount in Siemens’ sum-of-the-parts valuation. That being the case, given Conti’s “more attractive transaction structure”, the analysts predicted that Conti’s “re-rating should be more pronounced.”

Comparing Conti’s planned sale of the Vitesco division in April with the Siemens’ recent spin-off in an investor’s note dated 14 October 2020, the analysts characterised the Conti/Vitesco spin-off as “more promising” explaining:

“There are similarities between Siemens’ transaction and Conti’s. First of all, like Energy, Vitesco is a restructuring story. In addition, both divisions face significant structural changes in their end markets which makes them controversial among investors. The two business are also similarly sized (relative). We value Vitesco at €3.2bn or €16 per share in our SOTP (sum-of-the-parts) valuation which is roughly 16 per cent of Conti’s market cap.

Siemens Energy accounted for 16 per cent of the pre-deal market capitalisation of Siemens. However, Continental does not plan to keep a stake in Vitesco. Rather the company is planning to sell off 100 per cent. Consequently, a rerating should be more pronounced because “a) the potential share overhang could be smaller and b) Conti RemainCo’s earnings will not be diluted by Vitesco anymore.”

News of Vitesco spin-off is not new, but dates are not yet confirmed. So when do the analysts expect the sale to take place? “We expect the company to put it up for a vote at the next AGM at the end of April 2021. Thus, the spin-off could happen in mid-2021. Vitesco will probably host an investor day in the first quarter of 2021.”

The end of the Schaeffler/Conti era?

In some ways the spin-off of Vitesco appears to be a milestone in the Schaeffler/Conti connection. And a post-Conti Vitesco will be better placed to engage in the merger and acquisition consolidation activities that are taking place in the wider powertrain space (think of BorgWarner and Delphi). With this in mind, Jefferies highlights two possible directions: ”a) combine electronics and mechanics or b) remain focused on electronics.”

According to the analysts, the former was part of Schaeffler’s rationale to acquire Conti in 2008 (and is part of BorgWarner/Delphi’s rationale) while the latter better reflects Conti’s strategic focus: “We note that the Schaeffler family will own 46 per cent of Vitesco and currently owns 75 per cent of the capital of Schaeffler.”

Looking forward to Continental’s third-quarter 2020 results, which are due on 11 November, the analysts concluded by predicting pre-tax profit results well above expectations: “We expect Conti to pre-release third-quarter results as we are 41 per cent above EBIT consensus despite consensus moving up circa 30 per cent to 516 million euros (5.0% margin) over the last few weeks. We expect 728 million euros (7.0% margin).”