IHS Global Insight Perspective | |
Significance | The difficult relationship between Continental and its main shareholder Schaeffler intensified on Friday (6 March) when the former's long-standing Chairman Hubertus von Gruenberg resigned from his position as Chairman following a fractious board meeting. |
Implications | Hubertus von Gruenberg is the latest senior Continental management figure to relinquish his post following the Schaeffler. Vice Chairman and CFO Alan Hippe recently resigned while former CEO Manfred Wennemer resigned from his position last August after bitterly resisting the Schaeffler deal. |
Outlook | The departure of von Gruenberg means that there has been a complete overhaul of Continental's senior management structure in the last six months as a result of the Schaeffler takeover. This level of disruption at board level is hardly desirable at a time when Continental and Schaeffler are facing a liquidity crisis and the worst auto market conditions in living memory. |
The already strained relationship between the senior management of Germany's second biggest automotive component company Continental and the owners of its biggest shareholder reached a new low on Friday (6 March) when Continental Chairman Hubertus von Gruenberg resigned. Von Gruenberg accused Schaeffler owners, Maria-Elisabeth Schaeffler and her son Georg, of damaging Continental as a result of the leveraged takeover they pursued last year (see Germany: 21 August 2008: Continental and Schaeffler Agree Minority Ownership Deal).The takeover was completed just weeks before the onset of the banking and credit crisis plunged the world's stock markets into chaos and wrote billions off the value of Continental. Although Schaeffler now has de facto control over Continental, a shareholders' agreement aimed at sealing a deal which was acceptable to both Continental and Schaeffler's management limited Schaeffler's shareholding to a minority 49.9% stake until at least 2012. It also pledged that Schaeffler would allow Continental's management to pursue their own existing strategies and product plans during that period. It appear that von Gruenberg believes that the conditions of this agreement have now been breached, making his position as Chairman of Continental's supervisory board untenable. However, Schaeffler is 10 billion euro in debt as a result of a syndicated loan taken out to purchase Continental, and it is in the process of trying to secure financial assistance from the German government as it faces liquidity problems. Adding to its problems has been the dramatic collapse in Continental's share price, which has destroyed the value of Schaeffler's stake in the company and significantly lowered the value of collateral it has to secure any additional finance, or improved finance terms. Schaeffler's August offer of 75 euro a share was snapped up by investors and left it with around 90% of Continental's combined stock. This meant that Schaeffler has to "park" the excess shares with the banks that had financed the acquisition (see Germany: 16 January 2009: Continental Looks to Raise Capital; Banks Reveal Large Shareholdings). As of today, Continental's shares were trading at around 11 euro.
It appears that Schaeffler's aim to take full control of Continental is the source of the latest trouble between the two companies which has resulted in Hubertus von Gruenberg's resignation. According to a Financial Times (FT) report Schaeffler had proposed replacing von Gruenberg as a board member at the company’s next shareholder meeting in April. This prompted him to resign immediately. Speaking to the press afterwards he said, "In my opinion, Schaeffler's conduct has clearly violated the spirit of the investor agreement reached between the two companies." Schaeffler responded by accusing von Gruenberg of "sabotaging a joint solution and going after his own interests."
Outlook and Implications
Von Gruenberg had originally agreed in January that he would step down as Chairman but stay on Continental's supervisory board as an advisor (see Germany: 26 January 2009: Schaeffler and Continental to Form "Global Champion"; Schaeffler Wins Concessions at EGM). However, it appears that Schaeffler has moved to oust von Gruenberg and put into place its own nominee. Schaeffler's takeover of Continental, which is roughly three times its size in terms of turnover and staffing levels, has seen the privately owned company stretched to breaking point, with Continental and Schaeffler's combined debt now standing at around 22 billion euro. Schaeffler has already asked the German government for financial assistance (see Germany: 11 February 2009: Schaeffler Repeats Call for Government Help) to fill a liquidity gap of between 4 and 6 billion euro and help meet its annual interest payment of 900 million euro on the loan taken out to purchase Continental. Schaeffler is now doing all it can to gain as much control as possible over Continental in order to safeguard its investment in the company. There are also ongoing tensions between the existing senior management figures at both companies. Continental insiders reported from the weekend's board meeting that Continental's new chief executive Karl-Thomas Neumann (who replaced Manfred Wennemer) repeatedly asked his counterpart at Schaeffler Jürgen Geissinger about Schaeffler's plans for the future of the combined group but did not get an answer. Schaeffler, for its part, claimed that this joint strategy plan was not a subject for discussion on the agenda—a somewhat remarkable statement given the current plight of both companies. Insiders also reported that Neumann unveiled the results of the search for synergies between the two companies' automotive component divisions. People close to the matter said they had found 160 million euro in synergies, much less than expected. Following the meeting, Reuters reported that Schaeffler adviser Rolf Koerfler had been slated to become chairman on Friday, although this was held up by a court injunction.
Von Gruenberg's resignation is the latest in a series of high-profile executive departure following the takeover. He follows Vice Chairman and CFO Alan Hippe who resigned in February to take a role at steel manufacturer ThyssenKrupp and former Chief Executive Manfred Wennemer who resigned in August 2008. Wennemer had been a vocal critic and opponent of Schaeffler's attempts to gain ownership of Continental and in hindsight it appears that his criticism of the deal were correct. Now Schaeffler is facing trying to run Continental with a much less experienced senior management team who are unlikely to be willing to be objectively critical of the new owners. This is clearly undesirable as Schaeffler and Continental battle to survive the worst automotive market in living memory while at the same time battling with an immense debt burden.