Global Insight Perspective | |
Significance | Continental and the Schaeffler Group have confirmed that a "brief conversation" has taken place over a possible investment deal, following reports that Schaeffler was interested in acquiring the German component supplier. Meanwhile, Continental has confirmed its intentions for developing markets by opening new facilities in China and India. |
Implications | Any takeover would mean the Schaeffler Group acquiring a business with sales revenues almost three times higher than its own. |
Outlook | Although talks seem to be at the earliest of stages, there would be a number of potential benefits for Continental should a deal be agreed, including a return to a private business. However, Schaeffler would need to raise the required financing during a difficult period, and it might have to spin off parts of the business that it deems non-core to future operations. |
Following media reports of the possible acquisition of Continental by the privately owned Schaeffler Group, both sides have now confirmed that discussions over a possible investment deal took place last week. In a statement, Continental said that "one brief conversation about a possible engagement by Schaeffler Group in Continental AG took place", while a spokesperson for Schaeffler told Dow Jones Newswires that contact between the businesses had been made and that further talks would follow. The representative for Schaeffler also said that no timeframe had been set for talks or details laid out, and that the next move would "depend on Continental's reaction".
As a result of the interest from Schaeffler Group, Continental’s shares on the Frankfurt Stock Exchange have surged by more than 20% since Friday (11 July).
Continental Continues to Develop in Growing Markets
Meanwhile, Continental has announced that it has opened two new facilities in China and India. The former, located in Changshu, will be run by a wholly owned subsidiary known as Continental Automotive Systems (Changshu) Co. Ltd and will manufacture components for hydraulic braking systems, such as front and rear calipers, drum brakes, and products associated with braking actuation. A total of 600 million yuan (US$87.8 million) has been invested by Continental's Automotive Systems (CAS) division in the 25,000-square-metre factory, and it is planning on manufacturing 5 million calipers and 2.4 million actuation products by 2011, with a workforce of around 1,000 employees.
In India, the component supplier announced yesterday that it had inaugurated a new manufacturing and research and development (R&D) facility in Bommasandra (Bangalore). The company has invested 2.2 billion rupees (US$51.3 million) into the facility, which will manufacture a range of products for its CAS division, including instrument clusters, immobilisers, engine management systems, and electronic control units for power-steering systems. The R&D centre will have space for up to 400 engineers. As well as this, the president of Continental in Asia, Jay Kunkel, told the Financial Express at the opening of the unit that the company was also studying the Indian tyre market and would enter it before the end of the year with tyres supplied from Malaysia and Europe. Initial forecasts for shipments are said to be around 300,000 units in the first year. Markus Distelhoff, managing director of Continental Automotive Components India, added that the company is studying all options for tyre manufacturing in India, but that there are no firm plans currently in place.
Outlook and Implications
The decision by Schaeffler to look at acquiring Continental is unlikely to have been taken likely, but for a company with sales a third of those of the firm that it is pursuing (8.9 billion euro in 2007 versus projected sales revenues of 26 billion euro in 2008 at Continental), it is likely to be a huge undertaking, particularly if the reports suggesting that Schaeffler is willing to make the bid hostile prove correct. The valuation of the bid suggested would also seem to be low at 10 billion euro, particularly when measured against the 11.4-billion-euro acquisition of Siemens' VDO unit by Continental in 2007. Although the value of Continental’s shares has slumped by 50% during the past year, reflecting rising raw material costs and the pressures facing automotive-related businesses arising from the current economic downturn, this does not take into account the still strong margins that the business is producing, which will continue to improve as the integration of the two sides is completed. The current strategy of increasing investments in developing markets such as China and India, and of being at the forefront of future technologies such as those related to powertrain and vehicle safety, is also likely to offer strong growth potential for the business.
However, an acquisition could prove to be inspired to some extent. Certainly there are synergies between the two sides that could be developed, such as CAS's expertise in electronic powertrain and chassis systems and Schaeffler’s involvement in mechanical parts, while even Schaeffler's involvement in production machinery could be wrapped up with part of Continental's ContiTech unit. Continental might also benefit from being acquired by a private company, and could ultimately blossom if it does not have to listen to the demands of shareholders (Robert Bosch, the second-largest automotive component supplier in the world by sales, has benefited from this for many years). Ultimately though, Schaeffler is unlikely to be able to complete any acquisition by itself, and given the current state of the credit markets in the wake of the U.S. sub-prime mortgage fiasco, it may find it extremely difficult to raise the necessary funds. It may, however, find a partner, such as a private equity firm, which is willing to share the burden in return for taking over part of Continental's empire. The most likely candidate here is its tyre business, which offers fewer synergies with Schaeffler's business than the rest of the business, but could offer a risk-averse partner substantial rewards.