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Continental Rejects Schaeffler Bid; Plans to Alter Global Tyre Production Mix
17 Jul 08
Continental's management has said no to Schaeffler's initial full takeover bid, but remains powerless to stave off the growing influence of the bearing manufacturer.
Global Insight Perspective | | Significance | Continental has rejected the takeover bid launched by bearing manufacturer Schaeffler, with Continental CEO Manfred Wennemer describing the takeover attempt as "unlawful" and "highly opportunistic". Meanwhile, Continental is looking to move a greater proportion of its passenger car tyre production to the United States. | Implications | Continental's management have left investors and the markets in no doubt of their position, claiming that Schaeffler's offer of 69.37 euro per share is far too low. However, they have no way to stop Schaeffler buying shares on the open market or doing deals with major institutional shareholders to increase influence. | Outlook | While Schaeffler's initial bid has been rejected out of hand, by Continental's management the smaller company does not need to affect a full takeover to exert sizeable influence on Continental. At the same time Continental is preparing for major shifts in the demographics of the global vehicle market by enhancing its small passenger car tyre production capacity in the United States. |
Continental's Management Reject Schaeffler Takeover The senior management of Continental have rebuffed the initial takeover offer from the smaller German components firm Schaeffler, which specializes in the production of automotive bearings (see Germany: 16 July 2008: Schaeffler Confirms Official Offer for Continental Shares). According to the Financial Times (FT), Continental's CEO Manfred Wennemer has described Schaeffler's attempts to mount a takeover of his company as "egoistic, high-handed and irresponsible". Wennemer has said there would be no more discussions with Schaeffler unless the company substantially improved its initial offer of 69.37 euro per share. It would appear that there is some substance to Wennemer's stance as Continental's share price on the open market rose to just under 74 euro on the open market on Wednesday. In a further company statement released yesterday Continental said, "The Schaeffler Group is taking advantage of the current challenging equity market environment to acquire control over a strongly positioned technology company and to avoid paying an appropriate premium to the other shareholders of Continental." Wennemer also said that Schaeffler had secured its access to the company's shares in "an unlawful manner". Schaeffler has stated that it already had access to purchase 36% of the Continental's shares via options held by a group of banks, but claims this strategy was within German law and Bafin, the German financial watchdog, is currently looking into these transactions. According to the FT report, observers of the financial markets believe that the recent increase in Continental's share price has been driven by speculation amid investor hopes of a bidding war for Continental or an increased offer. However, sources close to Schaeffler's management have said that the initial bid was priced to fail and that the smaller company would be content to take a minority stake in Continental while gradually increasing its influence, while gaining effective control the traditionally low turn out at Continental's AGMs. However, Continental is continuing to work on future product and production strategies despite the distraction of the takeover talk. The company is looking to ensure it is ready to respond to major changes to future trends in the global light vehicle market and to this end it is investing US$60 million in moving some of its passenger car tyre production from Western Europe to the United States. The move will cut production costs, improve Continental's ability to counter the weakness of the dollar and increase the production capacity of small and medium production car tyres in the United States at a time when sales of these segments are increasing as a result of high fuel prices. The investment will be made in Continental's Mount Vernon facility in Illinois. The investment, which will be made over the next three years, will increase the production of passenger car tyres to 32,000 a day from 26,500, while truck tyre output will also increase to 8,800 a day up from 7,200. Around 75 new jobs will be created at the plant as a result of the investment. Outlook and Implications Many observers believe that there is little that Continental's management can do to rebuff Schaeffler's bid to launch a takeover of one of Europe's largest automotive components players. It is unlikely that there are many other suitable rival bidders to kick off a bidding war or allow Continental's management to form a strategic alliance to stave off Schaeffler's advances. Continental could try to bring in another minority investor to dilute Schaeffler's control, but under German law it would need the approval of its own shareholders to take such action. So it appears the way is clear for Schaeffler to push ahead to increase its influence on Continental. Following Continental's 11.4-billion-euro acquisition of Siemens' VDO unit by Continental in 2007 (see Germany: 30 November 2007: EU Approves Continental/VDO Deal; Largest in Auto Supply Chain History), 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 and Schaeffler is taking advantage of this low share price to mount its takeover attempt. It is likely that the major concern of Continental's management is that Schaeffler is following the private equity investment model by financing a leveraged buyout through selling off Continental's assets. Schaeffler could help finance its bid by selling Continental's ContiTech division and its tyre division.
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