Commentaries

A Blessing for Conti?

Three things stand out about the “compromise” reached between German auto parts and tyre maker Continental and its biggest shareholder Schaeffler to oust Conti’s CEO Karl-Thomas Neumann in favour of Schaeffler’s own man Elmar Degenhart.

This is – by the way – far from a good deal as far as the Conti minorities are concerned. It thrusts the company ever more firmly into Schaeffler’s pocket. Many Conti shareholders are probably wishing they had sold when 75 euros a share was on the table.

But anyway, back to what the compromise may mean.

The first thing is that Schaeffler appears willing — for now at least — to  allow Conti to raise 1.5 billion euros – as Neumann  had wanted – despite the fact that a share issue is likely to dilute the indebted family-owned company’s holding in Conti since it would be unable to follow its money and subscribe to new shares. Of course this does not specify the terms on which a capital increase might be done – and there’s still no certainty that anyone will want to stump up the cash.

The second is the wording of a statement from Schaeffler on its objectives:

The Schaeffler Group continues to adhere to its objective of creating a global technology group consisting of the three divisions Automotive, Industrial and Rubber.

This appears to say that Rubber — the tyres for which Continental is famous –  may remain part of a combined Conti-Schaeffler. There had been speculation that Schaeffler was pressing to sell this part of the business to help it pay down off some of the huge debts hanging over both companies.  Of course it doesnt necessarily bind Schaeffler to retain all of Conti’s assets – especially if the capital increase turns out to be undoable.

Schaeffler’s Continental drift

The power struggle at Continental hardly inspires trust in Schaeffler. The privately-owned ball bearings company wants to boot out Conti’s CEO — effectively tearing up a standstill agreement it signed last year — and install one of its own divisional managers.

Schaeffler should be stopped, for several reasons.

The first is that it flies in the face of an agreement it entered into with Conti’s shareholders to respect the car part maker’s independence. This is wrong. The deal, which prevents Schaeffler taking over Conti until 2012, also bound it “to support the ongoing strategy and business policy of the executive board while maintaining its current market and brand appearance, and not to demand a sale of operations or seek other significant restructuring measures”. Sacking the current CEO, Karl-Thomas Neumann, flouts the spirit if not the word of this.

Second, the move risks destabilising Conti’s business. The company has warned in an internal memo that contracts, customers and employees could be lost if Neumann is pushed out. Given that Conti is labouring under a 10 billion euro ($14.2 billion) debt load, this must be a possibility. And were it to happen it would hurt not only the Schaefflers but all Conti’s creditors.

Third, Schaeffler, which has been at loggerheads with Conti since taking a 49 percent stake last year, wants to install Elmar Degenhart — head of its own autos division — in Neumann’s seat. This represents a major conflict. Degenhart and Schaeffler will have a financial incentive to do deals that transfer value from Conti to Schaeffler. Take for instance an agreement that transferred 1 billion euros of value from Conti to the ball-bearing component maker. Although the value of Schaeffler’s stake in Conti would fall, it would still be 500 million euros better off.

The fact that Schaeffler is willing to publicly flout an agreement and sacrifice its own nominated chairman of Conti’s supervisory board, Rolf Koerfer, only deepens the suspicion about its motives.

The proximate cause of the fight seems to be Neumann’s championing of a capital issue to reduce Conti’s debts. Were the group to raise 1.5 billion euros in fresh equity, this would almost inevitably dilute the cash-strapped Schaeffler.

Schaeffler/Conti feud puts Schroeder back on stage

Gerhard Schroeder is back at centre-stage, seven weeks before Germany’s general election. A corporate feud between industrial holding group Schaeffler and car parts maker Continental AG has given the former chancellor the chance for a comeback as the workers’ champion, although he no longer holds public office.

When Schaeffler, the biggest family-owned industrial company in Germany, bought control of Conti last August, the two sides appointed Schroeder as guarantor of the interests of Continental and its workforce, shareholders and other stakeholders under an investors’ agreement.

With the new owners now trying to oust Conti CEO Karl-Thomas Neumann, the former chancellor has used his powers to demand information from Schaeffler – and take legal action if necessary — to enforce compliance with the pact. Neumann’s sin is to have proposed a share issue that would dilute Schaeffler’s control.

A published summary of the shareholders’ agreement does not explicitly bar Schaeffler from seeking to remove Conti’s CEO, but it commits the owners “to support the ongoing strategy and business policies of the Executive Board”.

Latest reports on Monday suggested Schaeffler was seeking a compromise in which both Continental chairman Rolf Koerfer, a Schaeffler loyalist, and Neumann would go — as would the disputed share issue — to avert a showdown at a Conti supervisory board meeting on Wednesday.

Schroeder’s cameo role has political overtones. It looks like part of a strategy by the Social Democrats (SPD), junior partners in an uneasy coalition with the conservative Christian Democrats (CDU/CSU), to paint themselves as the true defenders of German jobs and companies against predatory Big Finance.

The SPD is trailing far behind the CDU/CSU in opinion polls, with about 23 percent compared to 36 percent for Chancellor Angela Merkel’s conservatives.

from Margaret Doyle:

Deutsche deal shows Oppenheim weakness

How are the mighty fallen! Sal Oppenheim may be have been banker to Germany's elite for 220 years. However, a few rash investments over the past couple of them appear to have forced it into the hands of Deutsche Bank, the 800 pound gorilla of German banking. However, Oppenheim's clients may be less than delighted at the change of ownership.

The two admitted to being in talks enabling Deutsche to acquire a minority stake on Wednesday, though sources suggest that this could lead to a majority holding.

Oppenheim likes to boast that it is Europe's biggest 100 percent independent private bank. It rejected the idea that it might need a boost in capital from the state just a few weeks ago as its financial woes mounted. The private bank -- headquartered in Luxembourg since 2007 -- made its first loss since the World War Two (of 117 million euros) in 2008 on the back of a few spectacularly badly chosen deals. It invested in IKB, the subprime casualty, Arcandor, Germany's largest post-war insolvency, and Continental,  the tyremaker which was taken over by Schaeffler the ball-bearings maker in 2008, in an expensive and ill-timed deal.

The bank's owners -- some 40 or so shareholders from the Ullmann, Oppenheim and Pferdemenges families -- had to plug in 200 million euros last December to shore up its capital base. Partners at the private bank include aristocrats like Baron Christopher von Oppenheim and Count Matthias von Krockow.

However, with the further troubles among its industrial clientele this year, it looks like a further capital injection would have proven necessary in the absence of a deal.

Given the collapse of other, bigger, banks, its customers may well have started to get twitchy about Oppenheim's solidity. The deal would give Deutsche an "in" into Germany's wealthy aristocratic families and its industrious Mittelstand that it has so far lacked. Despite its small size, Oppenheim has been an adviser to some of the biggest players in Deutschland AG -- it had a hand in the Daimler's 1998 takeover of Chrysler and in Allianz's similarly poor acquisition of Dresdner in 2001.

However, Oppenheim may simply be swapping one set of problems for another. True, a small independent bank lacks the deep pockets of a huge, listed one. However, being the client of a huge investment banking group is not much happier, as UBS customers found out to their cost. Deutsche has been trying to build up its private bank for years. Presumably Oppenheim's clients had good reasons for not making the switch.

Debt albatross tails Conti Schaeffler

    The war between Continental and Schaeffler rumbles on. Karl-Thomas Neumann has got board assent for the capital increase he wants to pay down Continental’s heavy debts, a hard-fought for move that is likely to dilute the company’s largest shareholder Schaeffler.     But it is only a partial victory for the chief executive of the German auto parts group — and one that may yet turn out to be Pyrrhic. Neumann may yet be ejected from Conti for resisting Maria-Elisabeth Schaeffler and her right-hand man Juergen Geissinger (CEO of the privately-owned ball-bearing maker).     Schaeffler has already seen off several former Conti bosses — Manfred Wennemer left in August last year and CFO Alan Hippe has since quit. If it succeeds in pushing out Neumann and replacing him with its own candidate, Elmar Degenhart — at a meeting scheduled for August 12 — Schaeffler will then certainly push ahead with the sale of Conti’s well-known rubber business as a way of reducing its 11 billion euro debt.     Conti and Schaeffler have been deadlocked since the private group took a majority stake last year after an acrimonious takeover battle. Schaeffler’s ability to exercise control is constrained by its own heavy borrowings, much of which are against Conti stock which has lost two-thirds of its value.     Meanwhile, Conti is also labouring under massive borrowings, which its banks would like it to reduce. Both groups are at odds over how to reconcile their differing interests. Schaeffler, which has entered into a standstill agreement which prevents it from taking over Conti till 2012, does not want the target to issue more equity because it doesn’t have the cash to follow its money. Nor does it want to merge with Conti because it fears the exchange ratio would be disadvantageous.     What it would like is for Conti to sell assets to reduce its debt — even though this is hardly an ideal moment to do this. Shares in Michelin <MICP.PA> are trading at less than half their mid-2007 peak, while Bridgestone <5108.T> shares are at just over half their level in May 2006 and Pirelli <PECI.MI> shares are less than a quarter of their peak.     Neumann wanted Conti to raise 1.5 billion euros in fresh equity and then to merge with Schaeffler. The board has now consented to the first of these moves. However it remains to be seen if the banks will be queuing up to underwrite the issue, especially as Conti seems keen to issue it at a very narrow discount to the market price.     If Conti goes ahead, and neither Schaeffler nor its allies follow their money, Schaeffler’s direct stake could fall to 35 percent from 49.9 percent and its total stake (including shares held by its banks) to 63 percent from nearly 90 percent.     What seems clear is that the key players in this deadlock are the banks to both companies. They may themselves have differing interests. Conti’s bankers may not be keen on a change of management at the company, especially given the rapid changes which have already taken place at the top. And Schaeffler’s bankers might not welcome capital increases at Conti that diluted their equity position.     Debt has become an albatross around the necks of both companies, which only the banks are able to remove.

Conti should turn tables on Schaeffler

Porsche isn’t the only family-controlled German company that has got itself into a complete pickle bidding for a far larger rival.

    Indeed, if you want a test case of how ambition can land a company in serious financial difficulties, look no further than Schaeffler, a privately-owned ball bearings maker which has seriously overextended itself following a bid for listed car parts maker Continental last year.

    Despite snapping up 90 percent of Conti’s stock, Schaeffler could easily lose control of its intended prey and may end up being swallowed by it. (more…)