Feb. 10 (Bloomberg) — The German government will reopen negotiations with Schaeffler Group, the bearings maker strained by 11 billion euros ($14 billion) in debt from buying Continental AG, if the company agrees on a reorganization plan with lenders.
“When there is such a plan, there will be further negotiations,” Steffen Moritz, a spokesman for the Berlin-based Economy Ministry, said today in an e-mail. Schaeffler hasn’t yet submitted a proposal on how it would use government money, he said.
Schaeffler is preparing a business plan in consultation with banks and will present it to the government in coming weeks, said Markus Breidenstein, a spokesman for the manufacturer. Schaeffler paid 75 euros a share for control of Continental, Europe’s second-largest car-parts maker, or more than four times the current value, before the recession soured the auto market.
The company, owned by founder’s widow Maria-Elisabeth Schaeffler and her son Georg, was rebuffed in previous attempts for German aid. After talks on Jan. 28, the government said Schaeffler needs a “viable” business plan agreed to by its banks.
Chancellor Angela Merkel ruled out government support for Schaeffler, which needs 3 billion euros to 5 billion euros, Bild reported Feb. 2. Schaeffler’s home state of Bavaria said last month that only loan guarantees would be considered.
Schaeffler, which aims to combine auto-parts operations with Continental’s, may struggle to get banks on board because lenders will be hesitant to take on additional risk, Marc-Rene Tonn, a Hamburg-based analyst with M.M. Warburg, said in an interview. “The talks will be very difficult,” said the analyst, who recommends selling Continental shares.
Schaeffler, which owns 90.2 percent of Hanover, Germany- based Continental, probably will have to sell some shares, even at a loss, to convince Merkel’s government to help, Tonn said.
Schaeffler’s troubles have piled up since its July 15 hostile bid for Continental, a company three times its size. Schaeffler, based in Herzogenaurach, expected that derivatives contracts and what was then a low-ball bid would secure a stake of 30 percent to 50 percent. Instead, 82.4 percent of Continental’s capital was tendered, adding to a 7.8 percent holding, as investors sold amid collapsing markets.
Schaeffler’s top labor representatives, Norbert Lenhard and Uwe Beckmann, have written to the German economy and finance ministers to say that the company won’t resolve its financial crisis without aid from the government. The companies employ a total of 210,000 people.
Workers Want Power
IG Metall, the country’s largest union and representative for many of the 80,000 German workers, said that aid should be a last resort and be attached to conditions such as giving workers a say in running Schaeffler. The union also said banks should shoulder some of the burden for restructuring the company.
“Schaeffler Group needs short-term capital,” IG Metall directors Hartmut Meine, Werner Neugebauer and Armin Schild said today in an e-mailed statement. “Guarantees and further loans won’t solve the group’s structural problems.”
Schaeffler, which makes transmission parts and ball bearings for cars, planes and fishing reels, intended to create the world’s top auto-parts maker, merging Continental’s electronics and software expertise with Schaeffler’s mechanical know-how. The two companies have a combined 22 billion euros of debt as the global recession plunges the auto industry into its worst crisis in more than a decade. U.S. car sales plunged 37 percent in January in the worst month since 1981.
Royal Bank of Scotland Group Plc, along with UBS AG, Commerzbank AG, Dresdner Kleinwort, Landesbank Baden- Wuerttemberg and UniCredit SpA’s HVB Group unit, financed Schaeffler’s purchase.
Debt for Equity
The manufacturer may have to consider a debt-for-equity swap with lenders if it fails to get government aid or arrange other fresh capital, people close to the talks said. Banks would be reluctant to take control of the company because they may struggle to find buyers for Schaeffler assets. The company prefers to maintain control, the people said.
Continental’s tire business may have the best shot of being sold off to raise cash. The unit, Europe’s second-largest tiremaker, may find a buyer willing to pay 6 billion euros to 7 billion euros in the second half of this year at the earliest, one of the people said.
Continental is carving out the tire division into a separate business as Chief Executive Officer Karl-Thomas Neumann reviews a combination of the company’s remaining car-parts operations with Schaeffler’s.
Schaeffler directly holds 49.9 percent of Continental’s capital after transferring 40.3 percent to private German banks B. Metzler seel. Sohn & Co. and Sal. Oppenheim Jr. & Cie KGaA for possible sale later.
The arrangement is the result of an August agreement between the two companies that governs the relationship. It restricts Schaeffler from boosting the direct stake to a majority or adding to Continental’s debt, and calls on Schaeffler to support management’s strategy.