A few weeks ago, I would have said that the next big news about Continental AG would come on 31 July 2008, when the tyre and car component maker releases its results for the first half of 2008.
On 26 June, after Standard & Poor's changed the outlook to negative on its BBB credit rating, Continental's management insisted that they viewed their financing structure as "sound" and that this change would have "no effect on VDO financing – no additional costs". CFO Dr. Alan Hippe noted that this was equivalent to Moody's Baa2 with a negative outlook, and reflected the difficult market environment for issuing hybrid bonds. "Currently, we would only be able to place the hybrid bond planned as part of the VDO acquisition financing arrangements at extremely unfavorable conditions, which is why we have refrained from going ahead so far." The group continues to target annual sales of more than €26.4 billion in 2008.
But Continental is already back in the news. On Monday, it confirmed that "one brief conversation about a possible engagement by Schaeffler-Group in Continental AG took place at the end of last week." Yesterday, Schaeffler made a takeover offer for the group at €69.37 per share in cash. Unsurprisingly, this morning, Continental is announcing that "the Executive Board of Continental rejects the offer," adding that "the offer is highly opportunistic, does not come to the true value of Continental, does not create trust and lacks a convincing strategic rationale." The press release goes on to describe how Schaeffler took control 36% of Continental's capital "in an unlawful manner", or "using Porsche tactics" as the
Financial Times says.
True, the Continental share price had under-performed the DAX index: since July 2007, it lost some 50% of its value before the recent surge, compared to only 25% in the case of the DAX. But the current share price reflects investors' belief that less than €70 per share (or the weighted average price over the last three months) is not sufficient.
But who is Schaeffler anyway? Well, it is a German-based industrial group that supplies the automotive, machinery and aviation/aerospace sectors with mechanical, mechatronic and precision components, including a whole variety of bearings. INA, FAG (since 2001) and LuK are household brands for its customers (and competitors like SKF). Synergies, if any, are with CAS (Continental Automotive Systems), rather than with the tyre activities of Continental. Schaeffler is "an independent family-owned company, which, as a major shareholder with a long-term outlook, offers Continental AG the stability and security it needs to continue on its course in a difficult market environment." Schaeffler says that it does not want to break up Continental and that it will not need to upstream cash flows from Continental to service the takeover financing package.
Continental is one of the healthiest groups in its sector, with an attractive combination of complementary segments that do not follow exactly the same demand or investment cycles, ensuring a reasonable cash flow stream even in "bad" years. Schaeffler's tactics may look mean, but maybe they will trigger a counter-offer from a deep-pocketed financial investor who has been wondering how to use its sponsors' cash. But as far as independence goes, it could well be time for Continental to waive it goodbye...
d debt is already rated Caa1, highlighting a very high likelihood of default. With sky-high oil prices and a GM portfolio full of fuel-guzzling models, who will want to take up the $2 to $3 billion of new financing that GM intends to issue? Surely not your conservative portfolio manager, but an aggressive breed that is probably betting on a debt-to-equity swap several years (or quarters?) down the road.
