Is Maria Schaeffler The New Adolf Merckle?

Schaeffler, the German car parts company, wasn’t doing well a couple of weeks back, and things haven’t got much better since. After trying to find outside investors to take equity stakes in the company and dilute the urgent €10bn debt they’ve amassed, they’ve realised that no-one in their right mind would take on debts from a car parts company during a recession, so they turned to local government.

The owner, Maria-Elisabeth Schaeffler (who rocks hairspray and shoulder pads like Dynasty never happened), is asking for state aid to bail the company out, acknowledging that she will have to tap the family’s own wealth to pay their debts. Just like the Big Three in America being scorned by Pelosi, her first request was denied and she was told to come back when she had a better business plan outlining what the company was going to do with it. They can expect to give up a large chunk of equity whatever happens, potentially handing over the control of the company entirely if state aid fails and the banks move in.

Sound familiar? It’s exactly what happened to Adolf Merckle, fellow German industrialist and former head of all sorts of things like Heidelberg Cement, before he lost big. He was having to front his own personal wealth as collateral against loans after a short sell in VW shares went badly wrong, and went on to ask his local state government for aid to save his companies. His bid didn’t work, he saw his company being taken on by banks and equity dribble away to nothing, prompting him to take his own life.

So what went wrong for Schaeffler? Rather than a stock gamble, they took an equally big risk in making a highly leveraged acquisition at the peak of the market. As RBS, Baugur and many others now realise, this wasn’t wise. Schaeffler took on a minority stake of tyre makers Continental last summer, originally agreeing for a 49.9% stake to be built up over a few years. But then Lehman Brothers collapsed, the world went mental, and Continental’s investors decided that they’d accept Schaeffler’s earlier asking price of around €70 per share. OK, so Schaeffler were getting shares for cheaper than they had been, but the price was dropping all the time, and we were clearly entering a recession – what were they thinking? They ended up acquiring 90.2% of the shares; Continental’s share price has fallen ever since the first buyout at €75 per share – it now stands at €15.48 after going as low as €13. Schaeffler’s stake has lost €8bn in value since the buyout.

All this was funded with debt, and they also took on Continental’s debts that were amassed buying out Siemens’ VDO unit. Now no-one’s buying cars anymore, it all looks very, very bleak. At least, as the FT notes, lower raw material prices coupled with a greater demand for replacement tyres might help them out. Maybe Maria should cut out that article and frame it on her wall to gaze at while the vultures circle…

Posted by Ben Beaumont-Thomas in Hot Money | February 10, 2009 10:55AM |