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.

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.

    Following the bid battle, Schaeffler holds a 49.9 percent direct stake in Conti. A further 39.36 percent is held by Schaeffler's banks -- Sal Oppenheim and Metzler -- in a sort of warehousing deal to reflect the fact that Schaeffler does not actually have the money to buy the whole of Conti. Schaeffler has signed an agreement that it will not increase its stake above the current level prior to August 2012.

    This leaves Schaeffler in an awkward spot. It cannot consolidate Conti and the two companies continue to be run as separate units in an uncomfortable stand-off. Conti is not paying a dividend, meaning that Schaeffler can only finance the stake out of its own earnings. Meanwhile, Conti’s share price has fallen sharply from the 75 euros Schaeffler paid a year ago
to around 25 euros now.

    Both companies are highly leveraged. Schaeffler has debts of about 11 billion following the Conti takeover, while Conti has net debts of a similar amount -- just over 11 billion -- mostly the result of its purchase of VDO from Siemens. Its debts are equivalent to 71 percent of its enterprise value.

    It is Conti’s high debts which, paradoxically, may allow the target to turn on its pursuer. It must repay 3.5 billion euros ($5 billion) by the middle of next year and intends to raise equity to meet part of this liability. The only alternative would be to sell assets at low prices, which would hurt Schaeffler. There is talk of an equity issue to raise 1.5 billion euros.

    Unless Schaeffler was able to come up with the 750 million euros it would need to follow its money, its direct stake would be diluted. It is hard to see why its banks would invest either -- especially if they are relying on Schaeffler to take them out of their holdings at some point.

    Even though Schaeffler’s representatives dominate Conti's supervisory board, it would be difficult for them to torpedo a fundraising unless they had an alternative funding plan. Moreover, a cash crisis at Conti would hurt them very severely.

    Conti seems to be talking about issuing shares at a discount of around 15 percent to the current level. This looks very tight. But were it to do this, and Schaeffler did not invest, its direct stake would fall to 35 percent. And assuming its banks did likewise, the total stake would fall to 63 percent.

    Conti's chief executive Karl-Thomas Neumann, wants to seize the initiative and merge the two businesses. Following the capital raising, Conti’s equity value would be a touch under 6 billion euros. Neumann clearly thinks that would make it considerably bigger than Schaeffler. His proposal would be to push together the two businesses under Conti’s control.

    Unsurprisingly, the Schaefflers do not welcome the idea of being scrunched down in this way. True it would give them access to a listing, synergies from the merger and the possibility of repaying some of their heavy debts. But it might also deprive them of control.

    They are wriggling on the hook. They seem to believe, with the advice of JP Morgan, that their private company has an equity value of some 10 billion euros. On this basis they have rejected Conti’s advances.

    Meanwhile, Schaeffler is trying to get to grips with its own debts, hiring restructuring experts Houlihan Lokey to help out. It has bought itself some time with a 1 billion euro bridge loan.

    The outcome is likely to be decided by the bankers. And here it looks as if Conti has the edge. It is taking steps to cut its debt, while pushing for a resolution of the stand-off between
itself and Schaeffler. Meanwhile, Schaeffler looks to be playing for time while trying to stave off a deal by relying on what may be an unrealistic valuation for its own business.

    Conti has recently attacked Schaeffler publicly, accusing it of destroying value and behaving irresponsibly. If the bankers decide they want a deal, it may well be on Conti’s terms.

Asia’s sovereign wealth funds may be loaded, but they don’t need long memories to recall the big losses they’ve suffered on seemingly sure-thing investments in Wall Street’s troubled banks. So with reports that Lehman Brothers came up empty in efforts to win funds from top Chinese brokerage CITIC Securities and state-owned Korea Development Bank, it’s anybody’s guess where it will come up with the cash it needs to deal with an expected $4 billion in writedowns before announcing results in September.  

The path most traveled heads further east, to Singapore and the gulf, where investors could be equally, if not more gun-shy given the news flow. A ray of hope could shine from Singapore though. State investment firm Temasek said it was prepared to plunk more money into Western banks. An Singapore sling couldn’t come at a better time. This morning, Citi’s Prashant Bhatia became the latest big bank analyst to warn on Lehman and fellow investment banks Goldman and Morgan Stanley, lowering third quarter estimates for all three, and The Wall Street Journal says the Fed had called Credit Suisse last month to see if it had pulled a credit line from Lehman, acting to prevent a repeat of the cascading speculation that helped sink Bear Stearns.

U.S. private equity investor Lone Star is buying the rump of lender IKB, Germany’s most prominent casualty of the subprime crisis. The sale by state bank KfW closes an embarrassing and costly chapter for Europe’s biggest economy. IKB nearly collapsed a year ago under the weight of $24 billion in investments linked to risky U.S. home loans, making it Europe’s first major victim of the global financial crisis. The government brokered the first of three rescues to avert what the country’s banking watchdog warned could trigger Germany’s biggest financial crisis since the 1930s depression. But as the cost of the rescues spiraled towards 10 billion euros ($14.8 billion), Berlin started looking for a buyer.

In a Wagnerian triumph echoing through Europe’s car factories, ball-bearing maker Schaeffler has won the battle for control of tires-to-brakes firm Continental. Continental Chief Executive Manfred Wennemer, who had slammed Schaeffler as “egotistical, autocratic and irresponsible” after it covertly gathered 36 percent of Continental’s stock, will go by the end of the month, leaving the way clear for the creation of the world’s third-biggest car-industry supplier, with sales of $50 billion. The agreement allows Schaeffler’s stake to creep up to just under 50 percent. But with effectively 36 percent already, the Bavarian group owned by glamorous billionaire Maria-Elisabeth Schaeffler and her son already has control.

Mizuho Financial Group, Japan’s second-largest bank by assets, said it would invest $120 million in U.S. merger advisory firm Evercore Partners, marking the latest push by a Japanese financial company into the world’s largest economy. Mizuho and Evercore, a boutique company that advises on larger mergers and acquisitions, also agreed to work together on M&A deals between Japan and North America, the Japanese bank said in a statement. Though on a smaller scale than Mitsubishi UFJ Financial Group’s $3.5 billion deal for UnionBanCal Corp last week, which was seen as providing the Japanese lender with a U.S. base for its M&A dreams, and Tokio Marine’s $4.7 billion bid for Philadelphia Consolidated last month, it’s clear the Japanese are serious about overseas expansion, which is aimed at offsetting slackening growth in the domestic market. Acquisitions by Japanese companies abroad totalled $24 billion in the first half of this year, according to Thomson Reuters data, nearly matching the total for all of 2007.

Deals of the day:

* Investment firm Bay Harbour Management snapped up U.S. apparel chain Steve & Barry’s for $168 million at an auction, the retailer said.

* Polish restaurant operator AmRest has offered 20.2 million zlotys ($9 million) for 11.2 percent of smaller rival Sfinks to boost its stake to 25.5 percent, the company said in a statement.

* Mold Tek Technologies said it has signed a preliminary agreement with the promoters of a U.S.-based firm and its associate firm in India to acquire 100 percent stakes in both of them.

* Japanese communications satellite firm and pay TV broadcaster Sky Perfect JSAT said it would set up a joint venture with U.S. firm Stratos focusing on mobile satellite services.

It looks like Merrill Lynch has made up its mind regarding its house-cleaning priorities. The investment bank is expected to announce on Thursday that it will sell its 20 percent stake in Bloomberg LP back to the news and financial data company for about $4.5 billion, a source familiar with the matter said. No one on either side is talking, but selling the Bloomberg stake could help Merrill Chief Executive John Thain raise capital to make up for write-downs related in part to subprime mortgages. It is not immediately clear what role, if any, New York Mayor and Bloomberg founder Michael Bloomberg (pictured), who still owns about 70 percent of the company, has played in the Merrill transaction. Merrill also owns a substantial stake in money manager BlackRock Inc, but BlackRock, the largest publicly traded asset management company in the United States, said on Thursday that Merrill had decided against selling the stake. Merrill reports earnings later in the day.

Shares in Teva Pharmaceutical Industries fell nearly 1 percent on Thursday after reports it was in talks to buy rival Barr Phamaceuticals for up to $7.5 billion. TheMarker and Globes financial newspapers reported online overnight that Israel-based Teva, the world’s biggest maker of generic drugs, was in talks to buy New Jersey-based Barr in what would be a further consolidation of the generic drugs industry. TheMarker put the price tag at $7.5 billion, citing capital market sources. That would make it Teva’s biggest acquisition, surpassing the $7.4 billion purchase of Ivax two years ago. Globes cited a price of $7 billion to $7.5 billion. Barr has a market value of $5.1 billion.

And it’s starting to get ugly in Europe. Continental Chief Executive Manfred Wennemer withdrew from the public eye on Thursday to plot his defense against an unwanted $18 billion bid from family-owned Schaeffler Group. If Schaeffler succeeds in buying the group, which is three times its size, it would be the first time a German family business has taken over a company listed on the country’s blue-chip DAX index. But Schaeffler’s advances have stirred resentment at Continental’s headquarters in Hanover, sparking a war of words between both sides. On Wednesday, Continental’s Wennemer hit back at the offer, saying it was too low and warning that the predator could ultimately dismantle Continental. Schaeffler, owned by German billionaire Maria-Elisabeth Schaeffler, countered it had no such plans, labeling Wennemer’s tone “incomprehensible”.

More deals of the day:

** UK-based buyout firm Doughty Hanson said it agreed to buy a majority stake in TMF, a management and accounting outsourcing services business, for 750 million euros ($1.2 billion).

** Indonesia’s PT Bumi Resources has acquired a majority stake in Australian-listed Herald Resources Ltd after Herald’s board recommended Bumi’s improved A$563 million ($547 million) bid.

** Swiss insurer Zurich Financial Services said it would buy two Brazilian companies, paying up to $241 million and adding to a string of recent smaller acquisitions. Zurich said it would buy 87.35 percent of Companhia de Seguros Minas Brasil and 100 percent of Minas Brasil Seguradora Vida e Previdencia from Banco Mercantil do Brasil.

** Bank Hapoalim, one of Israel’s largest banks, said it had agreed to acquire 78 percent of Russian mid-sized SDM Bank for $111 million.

** Australian mining contractor Ausdrill Ltd has agreed to buy Taylor Wimpey Plc’s mining division in Ghana for $20 million, expanding its business in Africa, coveted by its suitor Macmahon Holdings Ltd.

** Daiichi Sankyo and Ranbaxy Laboratories said the Japanese drugmaker’s deal to take over the Indian firm was “binding and final”, but the statement failed to halt Ranbaxy shares slide.

** Chinese state-owned trading firm Sinosteel has lifted its stake in Australian iron ore explorer Midwest Corp to 54 percent, with its takeover offer due to close.

** Hudson’s Bay Co, the Canadian retailer whose name is synonymous with the country’s frontier past, was bought by the U.S.-based private equity fund that owns the Lord & Taylor department store chain, one of the oldest names in American retailing.

** Bilfinger Berger, Germany’s second largest builder, has bought U.S. industrial services specialist Tepsco from private investor Churchill Equity, it said.

Like a bad soap opera, the Internet storyline is getting more and more convoluted. The tale so far: Microsoft Corp, spurned by Yahoo Inc, is courting Time Warner Inc to allow a union with Internet division AOL. But Yahoo, which turned its back on Microsoft’s $47.5 billion bid, also wants AOL’s hand. These talks have taken on a new urgency ahead of Yahoo’s Aug. 1 shareholders meeting, a source familiar with discussions told Reuters on Tuesday. How either marriage will work is not immediately clear, but any combination will likely redraw the landscape for advertising on the Internet. So why is AOL so attractive? Both Yahoo and Microsoft view it as beneficial to leverage their positions in the Internet marketplace, where search giant Google Inc dominates. Stay tuned.

But good soaps are not only made in America. It seems the Germans are good at them, too. Tires-to-brakes maker Continental rejected Schaeffler Group’s surprise 11.2 billion euro ($17.8 billion) bid, saying only the family owned firm stood to gain from the offer which was too low. Late on Tuesday, the ball-bearing maker announced the terms of its proposed takeover after winning control of more than a third of Continental’s shares through a web of options organized for it discretely by banks. Schaeffler’s bearings are found in London’s landmark Ferris wheel, the London Eye and it also makes high-precision bearing supports for the U.S. space shuttle and the European launch vehicle Ariane, not that that has any bearing on a deal.

Some suitors, however, do get lucky. Mining company Cleveland-Cliffs Inc said on Wednesday it would acquire Alpha Natural Resources Inc for about $10 billion in cash and stock to expand its coal assets. Stockholders of Alpha, an Appalachian coal producer, will receive 0.95 of a Cleveland-Cliffs common share and $22.23 in cash for each of their common shares when the union is completed. Based on closing stock prices on Tuesday, the deal values Alpha at $128.12 per share, a premium of 35 percent, the companies said in a statement. The combined company will be renamed Cliffs Natural Resources and will include nine iron ore facilities and more than 60 coal mines located across North America, South America and Australia.

More deals of the day:

** Shareholders of utilities Suez and Gaz de France are set to approve a long-delayed 100-billion euro ($159.5 billion) merger, creating Europe’s second-largest electricity and gas group.

** The Co-Operative Group has agreed a long-awaited deal to buy Somerfield for 1.57 billion pounds ($3.1 billion) to strengthen its position as Britain’s fifth-biggest food retailer.

** Russian real estate company LSR said it had acquired a property developer in Yekaterinburg in the Urals region for 100 million euros ($159.5 million).

** Bank Hapoalim, one of Israel’s largest banks, said it was in advanced talks to buy at least 75 percent of Russian mid-sized SDM Bank at a value of $142 million.

** Irish healthcare services company United Drug said it had bought U.S. packaging maker Sharp Corporation for $99 million in cash.

** The board of Australian energy firm Roma Petroleum NL said shareholders should accept the revised A$49.4 million ($48.4 million) takeover offer from Queensland Gas Co Ltd.

** Parsvnath Developers Ltd said it will invest 4 billion rupees for a 38 percent stake in the Nanocity project in northern India.

** Shares in SK Telecom, South Korea’s top mobile carrier, fell early after a CNBC report that it was negotiating to buy Sprint Nextel Corp , the No. 3 U.S. mobile service.

** Swiss engineering group ABB said it will acquire U.S. transformer company Kuhlman Electric Corporation from private equity firm Carlyle Group for an undisclosed sum.

** EPIC Energy Ltd said it had acquired Sathian Sun Power Systems, a solar energy products supplier based in the southern state of Tamil Nadu, for an undisclosed sum.

** Airbus said it has agreed to set up a venture with Harbin Aircraft Industry Group (HAIG), the parent of Hafei Aviation Industry Co, to make aircraft components.