Continental AG Returns to Acquisitions After Debt Reduced

Continental AG, Europe’s second-biggest maker of car parts, plans to grow by buying other companies after cutting debt from a 2007 purchase that left it vulnerable to a hostile takeover bid.

Continental, which agreed last month to buy a U.S. company to add to its rubber-products business, may make another acquisition to expand the unit in 12 to 18 months and is considering smaller purchases for the automotive operations, Chief Executive Officer Elmar Degenhart said today at a press conference in Frankfurt.

The German manufacturer reduced debt last year to the lowest level since the purchase in 2007 of Siemens AG’s VDO auto-electronics unit. That transaction caused borrowings to balloon, tempting bearings producer Schaeffler AG into a botched takeover offer amid the global recession. Continental said last month that it plans to acquire Veyance Technologies Inc. for 1.4 billion euros ($1.9 billion), with the purchase immediately adding to earnings upon completion.

“For years now, we have been persistently expanding our room for maneuvering,” Degenhart said. “We have now gained the financial flexibility for larger acquisitions.”

Continental rose as much as 4.1 percent to 180.25 euros as of 11:09 a.m. in Frankfurt. The stock, which has been trading at about the highest price since at least August 1992 for almost a year, has gained 13 percent in 2014, valuing the manufacturer at 36.1 billion euros.

‘Makes Sense’

“It makes sense to grow from acquisitions,” said Marc-Rene Tonn, a Hamburg-based analyst at Warburg Research. “It helps them to strengthen their business. Continental is more focused on the non-automotive business and purchases that are significant but don’t have the scope of VDO.”

Degenhart reiterated a January forecast that 2014 sales will increase about 5 percent to 35 billion euros, more than double a predicted 2.4 percent expansion in global car production. Revenue last year rose 1.8 percent to 33.3 billion euros, with growth held back by currency effects.

Adjusted earnings before interest and taxes, excluding acquisition-related gains and costs, will amount to more than 10 percent of sales this year, Continental said. Ebit on that basis rose 3.5 percent to about 3.7 billion euros in 2013, with the margin at 11.3 percent.

Net debt narrowed by about 1 billion euros from a year earlier to 4.3 billion euros at the end of December, a figure Degenhart said is the lowest since 2006. Borrowings in the years following the VDO purchase totaled as high as 11 billion euros.

Non-Auto Revenue

Veyance will be added to the German company’s ContiTech plastics and rubber division. The purchase of Fairlawn, Ohio-based Veyance from the Carlyle Group will increase to 32 percent from 28 percent the share of revenue that Continental generates outside the automotive industry. Continental wants to raise the proportion to about 40 percent to help protect the company from economic fluctuations, Degenhart said.

The Veyance deal, which is targeted for completion in the fourth quarter, won’t affect Continental’s credit rating, Fitch Ratings said last month. Continental’s debt was raised to investment grade last year at Fitch, Standard & Poor’s and Moody’s Investors Service.

Continental doesn’t exclude selling a bond to finance the Veyance transaction later this year, though the company can probably use existing resources for the purchase, Chief Financial Officer Wolfgang Schaefer told journalists.

Driver Assistance

Spending on research and development in 2013 rose 7.7 percent to 1.9 billion euros. The company, which is also Europe’s second-largest tiremaker, plans to generate 1 billion euros in annual sales by 2016 from driver-assistance technology, Degenhart said.

Continental is targeting a fifth consecutive annual sales record in 2014, expanding on deliveries of parking-assistance systems and braking electronics. The manufacturer has a goal to outpace broader car-market growth by focusing on parts that help reduce vehicle emissions, increase driving safety and facilitate in-car communication links.

Schaeffler, Continental’s biggest shareholder, reduced its stake last year to 46 percent from 49.9 percent to free funds to reduce debt that piled up after its hostile bid for limited control backfired amid the 2008 financial crunch.

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