Conti boards decline takeover bid, but willing to talk

Tire Business staff report

Hanover, Germany (July 24, 2008) - The supervisory and executive boards of Continental A.G. have declined an $11.2 billion buyout offer made by Schaeffler Group after what Conti described as “intensive” deliberations.

Conti's two boards issued a statement July 23 that they came “to the strong conviction that the announced takeover offer by Schaeffler Group does not value the company adequately and fails to reflect the best interest of the company. In particular, it does not take tax disadvantages and increased refinancing costs triggered by such a bid into account. All members of both boards have declined the offer in its current parameters and fully support the continued legal examination by relevant financial supervisory authorities.”

Schaeffler, which acquired more than 30 percent of Conti's stock, recently offered to acquire the Hanover-based tire and automotive company for 69.36 euros-the equivalent of $110.20 cents per share at the current exchange rate. At the time, Conti called the offer “highly opportunistic, does not come close to the true value of Continental, does not create trust and lacks a convincing strategic rationale.”

In supporting all the actions taken by the executive board, the supervisory board said the two bodies “will continue to act in the best interest of the company and all of its stakeholders.”

However, Conti said both boards are of the opinion “that an agreement with Schaeffler Group is desirable.”

“In the case that Schaeffler Group shows willingness to negotiate about either an adequate premium for Continental shareholders or the willingness to limit their targeted stake to an acceptable level for Continental, the supervisory board has given the executive board its consent to enter into direct negotiations with Schaeffler Group.”

The boards added that after determining the intentions of the bidder and after publication of the offer document, the company will comment on the offer “in the context of the legally required response according to Section 27 of the WpÜG (German Securities Acquisition and Takeover Act).”

Global financial services firm Morgan Stanley & Co. International Plc said that from its analysis of the joint press release issued by the Conti boards, it had gleaned five key points.

The boards' statement marked a change in tone from the language of the initial management statement about the proposed takeover. The most recent press release “lacked the emotional language” of initial statements, Morgan Stanley said, citing the statement: “All members of both boards have declined the offer in its current parameters and fully support the continued legal examination by relevant financial supervisory authorities.”

The company said there was no specific mention of a defense strategy in the boards' statement, though it does highlight three issues with Schaeffler´s bid: the value of the offer; the tax disadvantages; and a trigger of increased refinancing costs.

According to Morgan Stanley, “Conti states that the offer does not value the company adequately. The release also states 'the supervisory board has…approved the pursuit of the options of action identified by the executive board.' Precisely what those actions are remains to be seen.”

The financial firm pointed out that, in principle, the boards did not reject outright a deal with Schaeffler. “Indeed, the release states that '... an agreement with Schaeffler Group is desirable.' Again, a significant change in tone from earlier statements.”

Pointing out that Conti's objecting to the deal's valuation is at odds with the potential trigger of higher refinancing costs, Morgan Stanley noted “that the higher the offer price, the greater consideration needs to be given to change-of-control lending covenants.”

The company concluded its analysis by saying the Conti boards' action demonstrates unity between them. In the supervisory board stating that it supports all the actions of the executive board, Morgan Stanley said the press release “appears to be designed to assure investors of unity between the two boards.”

From Tire Business (A Crain publication)

Continental shareholder to accept Schaeffler bid at 80 eur per share - report Forbes (Germany)

Schaeffler Gets Support for Continental Bid, Handelsblatt Says Bloomberg (Germany)

Continental AG to enter talks with Schaeffler without price target - source Thomson Financial (Germany)

Continental AG supervisory board sees 90-100 eur per share appropriate - report Forbes (Germany)