No quick fix seen for Schaeffler-Conti merger

ERJ staff report (AN)

Hanover, Germany (Reuters) -- Debt-laden German car parts suppliers Continental AG and Schaeffler Group might need months to fix a botched takeover and come up with a sustainable business strategy, sources familiar with the matter told Reuters.

"There is a chance that the companies and their banks will decide on key points by the end of this year," one person close to the negotiations said, "but it is rather unlikely that this will happen this month."

Schaeffler bought 90 percent of Continental last year at 75 euros per share only to have the deal backfire when global automotive markets collapsed. The companies have not yet merged, remaining as two separate groups.

On Friday Continental traded at 19.40 euros.

Now the partners are working on ways to combine the two businesses and shore up their finances.

A Schaeffler spokesman said on Friday: "We are still working on a quick combination of the two companies."

A Continental spokeswoman reiterated that the supervisory board was going to discuss options on July 30.

Sources close to the negotiations told Reuters, however, that creditor banks saw no need to hurry because Schaeffler has recently secured a bridge loan of 1 billion euros (about $1.39 billion).

"They won't run out of money next month," a person close to the Schaeffler banks said. "So there will be calm seas for the months ahead -- very calm."

The banks are not pushing for a quick solution as they hope that the value of the stakes in Continental and Schaeffler they have taken as collateral will recover along with car markets.

"If we swap debt for equity today, all banks will face serious writedowns," a consultant close to the negotiations said, adding there was plenty of scope for the partners to recover because their underlying business plan was intact.

Sources close to Schaeffler stress that caution was more important than speed.

"A master plan does not fall from the sky," one source said, adding several details had to be dealt with before striking a final deal.

Continental has been pressing for urgent action.

CEO Karl-Thomas Neumann announced at the company's shareholder meeting on April 23 that he was going to present a solution within 100 days.

According to sources close to Continental, Neumann will present two options at the July 30 meeting. One is the merger of the two companies under the roof of the Hanover-based tire maker, a move that would reverse the daring takeover by Schaeffler launched one year ago.

The alternative is the two companies going it alone.

"A 3.5 billion euro loan is due in summer 2010, so we will then have to think about a capital increase or the sale of business units if we decide on this," a board member told Reuters.

He said there was no reason to postpone the fundamental decision about which path to follow.

"We want to decide on one of those options on July 30", he added. "Nothing is worse than continuing uncertainty."

Continental ranks No. 3 on the Automotive News list of the top 100 global suppliers with estimated worldwide sales to automakers of $25.01 billion during the 2008 fiscal year.

From Automotive News (A Crain publication)