Aug. 21 (Bloomberg) -- Schaeffler Group won control of Continental AG with a sweetened bid that values the German tiremaker at 12.1 billion euros ($17.9 billion) and creates the world's largest car-parts manufacturer.

Schaeffler, the second-biggest maker of ball bearings, will pay 75 euros a share, 7 percent more than its original offer, and buy a stake that won't exceed 49.99 percent for four years. Continental Chief Executive Officer Manfred Wennemer, who had opposed the bid, will leave, the Hanover-based company said today.

The deal gives Schaeffler control of Europe's second-largest tiremaker without having to buy the whole company and take on 11 billion euros of debt. CEO Juergen Geissinger used stock options to build a stake and force Continental to sell in a strategy that parallels Porsche SE's creeping takeover of Volkswagen AG. Wennemer had said Schaeffler was seeking a purchase on the cheap.

``Continental was in a pretty poor negotiating position to demand a big price increase,'' said Robert Heberger, an analyst at Merck Finck in Munich with a ``buy'' rating on Continental. ``They did well to get 75 euros, even though it should have been higher.''

Continental rose 31 cents, or 0.4 percent, to 73.80 euros in Frankfurt trading. The stock has declined 17 percent this year. Herzogenaurach, Germany-based Schaeffler is closely held and owned by billionaire widow Maria-Elisabeth Schaeffler, 66, and her son.

Schaeffler's bid, which was raised from 70.12 euros, is 39 percent higher than Continental's close on July 11, the last trading day before the Financial Times and Frankfurter Allgemeine Zeitung newspapers reported that an offer was likely.

`Challenging Environment'

``You can always argue that an even higher price might have been possible, but considering the challenging industry environment one shouldn't be too greedy,'' said Christoph Berger, who helps oversee almost $100 billion at Cominvest Asset Management in Frankfurt, including Continental shares.

Terms of the deal stipulate that Continental will be kept intact and retain its stock listing. The agreement will be monitored by former German Chancellor Gerhard Schroeder, once the premier of Continental's home state of Lower Saxony.

Schaeffler has ``a much longer investment horizon'' than listed companies and was therefore able to make concessions, Berger said.

`New Chapter'

``The dispute regarding the public takeover offer has been settled,'' the tiremaker said in the statement. ``Continental will start a new chapter in its history and therefore CEO Manfred Wennemer has asked to be released from his duties.''

Schaeffler spokesman Detlef Sieverdingbeck said the company ``would gladly have continued to work with Wennemer.''

Continental's shares trade at 11 times estimated earnings, in line with the average for the 16 European auto-parts companies, according to data compiled by Bloomberg. The stock is more expensive than that of Clermont Ferrand, France-based Michelin & Cie., Europe's largest tiremaker, which has a price- to-earnings ratio of 8.4.

Continental became vulnerable to a takeover after last year's 11.4 billion-euro purchase of Siemens AG's VDO car- components unit added 9.5 billion euros to its debt and caused the share price to decline by more than 50 percent. Schaeffler made a formal offer on July 30, two weeks after announcing it controlled almost 36 percent of Continental, including 28 percent through swap rights.

Wennemer, 60, took over as CEO in September 2001 and used the VDO acquisition to transform the tiremaker into a car-parts supplier second only to Robert Bosch GmbH. He called Schaeffler's swaps illegal and said on July 16 that the approach was ``egoistic, high-handed and irresponsible.''

BaFin Ruling

German financial regulator BaFin said today that the swaps positions didn't breach disclosure rules. Wennemer is to leave the company by Aug. 31, and a successor will be appointed in the ``immediate future,'' Continental said.

Manager-Magazin reported, without citing where it got the information, that Continental's technology chief Karl-Thomas Neumann would be appointed to succeed Wennemer at a meeting on Saturday. Continental spokeswoman Antje Lewe declined to comment.

The departure is ``logical'' and testimony to Wennemer's character, Rober Halver, head of research at Baader Bank in Frankfurt, told Bloomberg TV. Still, the departing chief is ``the loser in this deal if you want to find one,'' he said.

Constructive Agreement

Schaeffler had always sought a constructive agreement in the best interests of both companies, CEO Geissinger said in a statement.

Schaeffler held more than 13 million Continental shares, or 8.04 percent of the total, as of Aug. 19, not including its swaps positions. Continental agreed to the deal in the knowledge that, having made a formal offer, Schaeffler could use the swaps to increase its ownership above 30 percent without having to repeat the bid and then go on to accumulate a majority over time.

Investors have until Sept. 16 to tender shares under the new agreement.

``The time of insecurity and ambiguity is over,'' Werner Bischoff, executive of the IG BCE union and deputy chairman of Continental's supervisory board, said in a statement. ``We welcome that this result could be reached at the negotiating table.''

A holding of more than 50 percent would have allowed banks to renegotiate or demand repayment of loans made to buy VDO. The loan is due to be repaid by 2012. Schaeffler has agreed to keep its holding to a minority until then.

Schaeffler promised to compensate Continental for possible negative effects resulting from such change-of-control provisions as well as negative tax effects that could total 522 million euros.

Same Strategy

The ball-bearing maker also agreed to maintain Continental's Hanover headquarters and retain its strategy, business divisions and dividend policy. It also agreed not to increase its debt-to-equity ratio without Continental's consent. The companies will also look for strategic projects, particularly in the Powertrain division.

Continental is targeting sales this year of more than 26.4 billion euros, making it almost three times the size of Schaeffler. Continental's workforce totaled 149,113 employees as of June 30, a 67 percent increase from a year earlier. That compares with Schaeffler's 66,000 employees.

Following the VDO purchase, as well as the $1 billion acquisition of Motorola Inc.'s automotive-electronics unit in 2006, Continental's product line includes dashboard instruments, communications and navigation systems, vehicle-stability equipment and transmissions.

The acquisitions put Continental on a par with Stuttgart, Germany-based Bosch as a supplier to the worldwide auto industry. Continental ranks second to Michelin & Cie among European tiremakers.

Aircraft Components

Schaeffler, formed when INA-Holding Schaeffler KG bought FAG Kugelfischer AG in a hostile bid in 2001, makes parts for vehicle transmissions and chassis, in addition to factory equipment and precision components for aircraft. Schaeffler ranks second to Sweden's SKF AB in making ball bearings.

Continental and Schaeffler have a 13-year-old joint venture to produce timing belts for cars. Volkswagen, Europe's biggest carmaker, is the largest customer of both manufacturers and has backed the merger.

To contact the reporters on this story: Chris Reiter in Berlin at creiter2@bloomberg.net or Nadja Brandt in Los Angeles at nbrandt@bloomberg.net

Last Updated: August 21, 2008 13:36 EDT