Conti-Schaeffler merger set to be great for banks

Creditor banks are set to take big stakes in tire maker and auto parts group Continental AG once it integrates the operating business of Schaeffler, whose daring bid to buy its bigger peer backfired, sources close to the matter said.
 
The reversal comes as Schaeffler faces increasing difficulties paying back the 11 billion euros ($15 billion) of debt it amassed to buy Continental before the financial crisis.
 
After months of discussions with creditors Schaeffler said this week it is mulling a plan that could see it take the junior role in a merger with Continental.
 
Sources with knowledge of the deal say Schaeffler's banks will probably end up with a majority stake in this new group.
 
"All options are being examined with the outcome open," Schaeffler CEO Juergen Geissinger said on Friday. "There must not be winners and losers."
 
The sources say the solution for the debt-ridden group could look like this:
 
Conti would buy the operating business of the bearings maker, leaving Schaeffler as a purely financial holding company controlling in effect 90 percent of Conti shares.
 
"If Schaeffler can get 5 billion euros for its business, that would be the upper end of the scale," one banker close to the matter said.
 
Schaeffler would use this money to repay some of its debt, while Schaeffler's banks would grant a new loan to Conti, which already has a debt pile roughly as big as Schaeffler, the sources said.
 
At the same time, the banks would subscribe for new equity issued by Continental. This would reduce Conti's debt and dilute Schaeffler's stake to a minority. The German government would supply guarantees for the Conti loans.
 
This draft plan would let banks avoid the major writedowns they would face in a debt-equity swap for Schaeffler loans. A combined company could achieve synergies rapidly and thus increase its ability to reduce debt.
 
The assessment of Schaeffler's enterprise value remains one of the key unresolved questions in this deal, the sources said, and also, no answer has been found so far for tax issues Schaeffler co-owner Georg Schaeffler will face when selling his stake in the company.
 
It was also unclear whether Geissinger will have to give up his ambitions to lead the combined company.
From: Automotive News Europe
"That will be dealt with in a second step", a source close to the negotiations among banks, Schaeffler and Conti said.
 
German media reports have said that Conti CEO Karl-Thomas Neumann will head the combined company, while Schaeffler's finance chief Klaus Rosenfeld will be chief financial officer.
 
Geissinger might lead the bearings business for industrial clients, which unlike the auto business of the two companies was not the key factor for launching the audacious hostile bid for Continental, media reports said.
 

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