Global Insight Perspective | |
Significance | The EC has formally approved the planned takeover by Schaeffler of its much larger rival Continental, as it appears that the former wants to merge the two entities in order to load the buy-out debt onto Continental's books. |
Implications | The EC's approval of the Schaeffler takeover means they are satisfied that the new entity would not affect the competitive structure of the European automotive components supply business. Any move to merge the two companies will effectively load Continental with the borrowings that was used to acquire it, plus Schaeffler's existing debt, a figure in the region of 23 billion euro. |
Outlook | Continental already has significant debt of its own as a result of its acquisition of the VDO auto components unit from Siemens. It must now hope that if Schaeffler's debt is loaded onto its books that this does not have a marked adverse effect on the company's share price and credit rating at a time when the global automotive industry is facing recession. |
Schaeffler Gets Formal Approval for Continental Buy-Out
The European Commission (EC) has formally cleared the proposed acquisition of Continental by the smaller, privately owned bearings manufacturer Schaeffler. It concluded that the transaction would "not significantly impede effective competition in the European Economic Area (EEA) or any substantial part of it". The EC's statement on the proposed takeover said that there was little crossover between the two companies, despite them both operating in the sphere of automotive components as "Schaeffler is a manufacturer of a great number of mainly mechanical products used in automotive, industrial and aerospace applications. Continental supplies electrical products and systems to the car industry. Continental also manufactures industrial rubber products." The EC found that the new entity would not have the ability to discriminate against its competitors in the market as there are credible alternative suppliers. The approval means that the acquisition is now likely to be formally concluded in January when Schaeffler's original tender offer closes and the company is likely to control 90% of Continental's shares as a result of an unexpectedly high take-up of the tender. Schaeffler will have to park around 40% of this total with banks and other investors as it agreed to only take a 49.9% stake in Continental in the short term in order to push through the deal.
Last week it was claimed by the Financial Times (FT) that Schaeffler was considering merging the two companies' automotive businesses, together with the multi-billion-euro debt from Schaeffler that was used to acquire Continental. This includes the 16.1-billion euro figure that was borrowed by Schaeffler to acquire Continental, which takes the privately owned company's debt to around 23 billion euro. If the two businesses were merged this would be added on to the books of Continental's pre-existing debt of around 11 billion euro (see Germany: 15 December 2008: Continental Asks to Reschedule Debt). To further complicate matters it appears that Schaeffler's major shareholder Maria-Elisabeth Schaeffler has fallen out with Continental Chairman Hubertus von Gruenberg over the plans as well as Schaeffler's request to be consulted over the rescheduling of Continental's own debt.
Outlook and Implications
After weeks of wrangling Continental and Schaeffler agreed a deal in August that would see the smaller company limit itself to a minority stake in Continental of 49.9% until at least 2012, while Schaeffler also at that time agreed that it would also allow Continental's management to pursue pre-existing strategies during that timescale (see Germany: 23 August 2008: Continental and Schaeffler Agree Minority Ownership Deal). However, it is unclear how the pledge to not interfere with Continental's management can be squared with reports that Schaeffler is looking to replace Continental Chairman. Schaeffler has said that it aims to appoint four of its own managers to Continental's supervisory board as soon as possible, although the company has so far declined to say whether it will seek to appoint one of its own people as chairman. Schaeffler's tender for Continental's shares saw it acquire around 90% of Continental's stock from shareholders after it offered 75 euro a share just before the stock markets crashed in October. As a result, Schaeffler effectively found itself paying over the odds for Continental and it now appears to be looking to park its excess holding with banks on Continental's side. With the news that the Schaeffler full takeover is imminent, Continental's shares have fallen to around 30 euro at the time of writing, meaning that Schaeffler would make a multi-billion euro loss on what it paid for the stake if it were to sell in the open market now. Schaeffler claims that the financing for its takeover remains robust, but a Handelsblatt report last Friday (12 December) claimed that Schaeffler needs 4-7 billion euro of new share capital in the short term in order to service the 23 billion euro it has incurred, largely through the purchase of Continental.
It remains to be seen how the markets will react to the new entity—which will have combined debt of around 34 billion euro—at a time when the global automotive industry is struggling in the gathering gloom of recession and many of Continental's and Schaeffler's key customers are facing falling sales and are themselves under enormous pressure to lower costs to a minimum.