Conti-Schaeffler merger defies industrial logic - Morgan Stanley

ERJ staff report (DS)

London -- A merge between Continental and Schaeffler defies industrial logic, according to Morgan Stanley analyst, Adam Jonas. Jonas says in a new report, "Continental did not seek out cooperation from Schaeffler in the first place. In our view, Conti should not be expected to shoulder any of Schaeffler's financial liabilities, even if the combination makes industrial logic."

Jonas continues, "Strategic rationale of a full integration between Conti and Schaeffler is very weak, in our view." and concludes, "Continental is in a greater position of strength than Schaeffler. As such, Conti deserves to pursue (or reject) a combination on its own terms."

Jonas strongly recommends against any divesting of the rubber group. "Conti has initiated the process to create an organizationally and legally independent Rubber Group (carve out) which can present further potential divestiture opportunities to help manage the financial position. On our calculations, the Tyre and ContiTech businesses are more cash generative and substantially less cyclical than the Automotive Group divisions. While a divestiture may help lower the net debt burden upfront, it could come at the cost of lower operational free cash flow. We also believe the company could struggle to get a full and fair valuation for these valuable assets."

The analyst says there is no real industrial logic to a merger, and he financial risks associated with the Schaeffler group could threaten the financial security of a merged group.

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Research report from Morgan Stanley