Commentaries
Now raising intellectual capital
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.
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.
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.
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.
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
 Â
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.
-
The Wall
