Schaeffler Could Lose Operational Control Of Continental Just 9 Months After Buying It Out

If the financial crisis teaches us anything, it’s to avoid highly leveraged buyouts that attempt to make your company artificially bigger than its rivals. Classic examples include RBS taking over Natwest and then ABN Amro, and seemingly renting out half the office space between Liverpool Street and Aldgate; Baugur trying to take over the British high street but doing so by buying crapola like Whittard, MK One, French Connection and Woolies; Porsche attempting to buy out VW despite their revenue being based on financial wizardry and overpriced gauche cars, rather than VW’s broad portfolio.

Another classic example is Schaeffler, the ball bearings company who made Stretch Armstrong look positively stunted with their takeover of tyre manufacturers Continental last year. Needless to say, the debt mountain they took on to fund it didn’t get any smaller when the recession hit. Schaeffler’s stake has lost €8bn in value since the buyout began.

We’ve already seen how Maria Schaeffler, the owner of the company, turned to the German government for a bailout and got denied; she then had to deal with the ignominy of having her company accused of using the hair of Auschwitz victims to make textiles. Not now you understand, but back during the war – still not fantastic PR either way. Her recent appearance at a ski resort wearing the plushest fur imaginable didn’t go down too well either when she’s meant to be playing the role of the prudent CEO.

Now the debt-for-equity swap that banks were pressing for is starting to get hashed out, but it’s not looking quite as bad as first indicated for Schaeffler, when Maria was set to hold onto just 20%. Continental are set to regain operational control of the whole company, turning the original deal on its head. The FT’s sources say that Schaeffler is still set to retain its 90% stake in the company though, but that it might well have to give some of that up in order to fund a capital injection. So maybe not the worst case scenario for Maria, but the shame at rescinding control of your company to the one you bought out just 9 months ago must be pretty hard to bear. And the fact that the banks don’t want the equity isn’t really a ringing endorsement.

Of course, instead of buying out someone who’s much bigger than you, it’s a better idea to hang on to your cash and wait for a recession when all your rivals start dropping like flies. Then schmooze the PM of your country over cocktails, get him to waive some competition rules, and bingo! You’ve got more assets than you can shake a stick at, and for knockdown prices!

Posted by Ben Beaumont-Thomas in Hot Money | May 21, 2009 11:59AM |