Schaeffler Sells 10% Continental Stake for $2 Billion

Schaeffler to Sell 10% Continental Stake for About $2.13 Billion
Family-owned Schaeffler gained control of Hanover-based Continental in 2008 at the height of the financial crisis. Photographer: Hannelore Foerster/Bloomberg

Schaeffler AG, a German industrial bearings maker, sold a 10.4 percent stake in Continental AG for 1.6 billion euros ($2 billion) to reduce debt after a failed takeover of the tire producer.

M.M. Warburg and Bankhaus Metzler disposed of the 20.8 million Continental shares they were holding on Schaeffler’s behalf for 77.50 euros apiece, the Herzogenaurach-based company said today in a statement. That was 4.9 percent less than Continental’s 81.49-euro closing price yesterday.

Family-owned Schaeffler gained control of Continental, Europe’s second-biggest car-parts supplier, in 2008 at the height of the financial crisis. The takeover bid backfired when more investors than Schaeffler expected accepted the offer as markets collapsed, leaving it with more than 90 percent of the shares and more than 10 billion euros in debt. Cash from the stake sale will cut debt at the Schaeffler Holding parent company by 31 percent to 3.5 billion euros, it said today.

“This share sale makes sense, because Schaeffler is still highly indebted,” Tim Schuldt, an analyst with Frankfurt-based Equinet Bank AG, said today by phone. “The dividend yield is less than their cash costs on the loans, which means that they actually have to insert cash to service the debt.”

Stock Declines

Continental fell as much as 4.9 percent to 77.47 euros, the biggest intraday drop since July 23, and was trading down 4.6 percent at 2:30 p.m. in Frankfurt. The stock, which re-entered Germany’s benchmark DAX Index yesterday, has gained 62 percent this year, valuing the company at 15.6 billion euros.

Schaeffler’s bonds rose to a record and were the top three gainers in the Bank of America Merrill Lynch high-yield index. The manufacturer’s 400 million-euro 8.75 percent notes due 2019 gained 1.2 cents to 113.47 cents on the euro, pushing the yield down to 6.3 percent, according to data compiled by Bloomberg.

The German bearing maker refinanced debt in February with about 8 billion euros of loans, including a 1.4 billion-euro loan sold to institutional investors, and 2 billion euros of high-yield bonds, according to data compiled by Bloomberg. In June, the company added three banks to its loan facility, raising the total to 11. Schaeffler’s stock isn’t traded.

Banks’ Holdings

Schaeffler’s direct stake in Hanover, Germany-based Continental was limited to just less than 50 percent under a four-year agreement between the two manufacturers in August 2008 intended to settle the takeover dispute. Banks held the excess Continental stock that investors had sold to Schaeffler.

The share sale and the end of any contractual agreements between the two banks and Schaeffler will reduce “complexity in the participation structure,” Schaeffler Chief Financial Officer Klaus Rosenfeld said in today’s statement.

The amount of Continental’s freely traded stock increases to 50.1 percent from 39.7 percent. The Schaeffler family agreed to keep its current 49.9 percent holding in the auto-parts maker for the next six months, remaining its biggest shareholder, the company said.

“Our participation in Continental is of long-term and strategic nature for the Schaeffler family,” owners Maria-Elisabeth Schaeffler and Georg Schaeffler said in the statement.

Cooperation Work

The companies are involved in more than 30 joint industrial projects at different stages of development, including turbo chargers and an electronic parking brake, said Hannes Boekhoff, a Continental spokesman. The manufacturers have also teamed up in purchasing, which led to savings of 350 million euros to 400 million euros in the three years through 2011.

“Our successful cooperation in a variety of topics and projects continues as before,” Boekhoff said by phone.

Continental, which is also Europe’s second-largest tiremaker, raised its 2012 revenue and profit forecasts in August after second-quarter earnings jumped because of lower raw-material costs. The growth, and a 1.1 billion-euro share sale in 2010, helped Continental reduce debt to 6.88 billion euros in June from a peak of 10.9 billion euros in 2007 following the acquisition of the VDO car-parts business from Siemens AG.

Chief Executive Officer Elmar Degenhart said this month that he expects Continental to continue to grow faster than global car markets by 4 to 5 percentage points next year. Degenhart forecast an increase in worldwide light-vehicle production of as much as 3 percent in 2013, as expansion in North America and Asia offsets stagnation in Europe.

Schaeffler Forecast

Schaeffler reiterated its full-year forecast on Aug. 28 as demand outside Europe helped sales rise. The company is targeting sales growth of more than 5 percent to about 11.2 billion euros this year. Earnings before interest and taxes should exceed 13 percent of sales.

Goldman Sachs Group Inc. managed the share sale as global coordinator, while UniCredit SpA and Commerzbank AG were bookrunners.

The stock disposal leaves room for “speculation of further placements in future,” Michael Punzet, a Frankfurt-based DZ Bank analyst, wrote in a note to investors.

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