Continental Tire Rejects Schaeffler Bid, Open to Deal

Continental Tire Rejects Schaeffler Bid, Open to Deal

July 23 (Bloomberg) -- Continental AG, Europe's second- largest tiremaker, agreed to start takeover talks with Schaeffler Group as it rejected the ball-bearing maker's 11.3 billion-euro ($17.8 billion) approach for a second time.

An agreement to sell all or part of the company to Schaeffler is ``desirable,'' providing the price is increased, Hanover-based Continental said today in a statement. The bid ``fails to reflect the best interest of'' Continental, it said.

Continental's management and supervisory boards held a special meeting today after Schaeffler said eight days ago it controlled almost 36 percent of voting rights and would bid for the rest. A purchase by German billionaire Maria-Elisabeth Schaeffler's company would rank as the car-parts industry's largest since Continental's acquisition of Siemens AG's VDO unit in 2007.

``It was a soft rejection,'' said Marc-Rene Tonn, a Hamburg- based analyst with M.M. Warburg who has a ``buy'' rating on the tiremaker's stock. ``It certainly leaves everything open.''

Any investment would need to reflect an ``adequate premium'' or limit the size of the targeted stake, Continental said in a statement. The supervisory board gave Continental's management consent to negotiate.

Schaeffler, based in Herzogenaurach, offered 70.12 euros a share for the company, the lowest allowable bid under German law. Continental fell 0.6 percent to 72.57 euros before the announcement, extending its decline this year to 18 percent and valuing the company at 11.7 billion euros.

Echoes of Porsche

Schaeffler's low-ball offer, portrayed as a desire to take a minority stake, echoes Porsche SE's purchase of 31 percent of Volkswagen AG last year. Schaeffler already controls more than a third of the tiremaker's voting rights, mainly through swaps. The bid also follows other moves in the past three years by German carmakers, including Volkswagen's purchase of a dominant holding in MAN AG, Europe's third-biggest truckmaker, in 2006.

Continental had offered to support the purchase of a 20 percent stake. Schaeffler Chief Executive Officer Juergen Geissinger declined, insisting on a holding of at least 30 percent, at which point German takeover law requires a full takeover offer. Schaeffler is offering the legal minimum. If the bid fails, which it may be designed to do, Schaeffler can still gradually build its holding.

Schaeffler ``welcomes'' Continental's interest in reaching an agreement, spokesman Michael Reinert said in a telephone interview. The company is waiting for Continental to ``specify'' what direction it wants to take, he added.

Financing in Question

Chief Executive Officer Manfred Wennemer vowed on July 16 to fight the bid, arguing it undervalued the manufacturer and lacked strategic rationale. He also objected to Schaeffler's use of swaps to secure its stake.

Royal Bank of Scotland Group Plc is organizing a loan for Schaeffler to finance its bid, with help from Commerzbank AG, Dresdner Kleinwort and UniCredit SpA, according to two bankers involved in the financing.

The combined company would overtake closely held Robert Bosch GmbH as the world's biggest car-parts supplier.

Car-parts makers have been squeezed by slumping demand and soaring costs. Auto sales have fallen 10 percent in the U.S. and 2 percent in Europe this year as customers hold back spending because of concerns about economic growth and soaring gasoline prices. Oil, also used in tiremaking, has risen 70 percent over the past year.

VDO Purchase Loan

Schaeffler, which succeeded with a hostile takeover bid for FAG Kugelfischer in 2001, has said it is content with a minority stake above 30 percent. A majority holding would trigger a renegotiation clause in a 13.5 billion-euro loan that Continental arranged last year to finance its purchase of VDO.

``What Schaeffler has to decide is, do they want to make it hostile or friendly,'' M.M. Warburg's Tonn said.

Schaeffler will be wary of raising the price and risking a ``strong acceptance,'' the analyst said, which could put it above a threshold that forces it to renegotiate or pay back the VDO loan. ``You have to have something in your hand to make Schaeffler offer a higher price,'' he said.

Credit-default swaps on Continental fell 15 basis points to 267, according to CMA Datavision prices at 4:45 p.m. in London, before the announcement.

Credit-Default Swaps

A basis point on a credit-default swap contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

``In the current market it looks difficult to raise so much money,'' said Christophe Boulanger, a credit analyst at Calyon in London.

``If Schaeffler's bid is successful, they will undertake about 10 billion euros of Continental loans with change of control clauses that mean the banks have the right to demand immediate repayment,'' Boulanger said. ``To avoid having to pay out 10 billion euros immediately, Schaeffler will have to seek waivers. That will increase the cost of the loans by maybe 150 basis points.''

BLOOMBERG