The banks are concerned that the debt at a merged company would be too high, hurting chances Continental would be able to pay it all back, according to the people, who asked not to be identified because the discussions are private. The creditors are aiming to create enough backing to block changes to a loan agreement first reached in 2007, said the people.
“Continental can do very little without the approval of its banks,” Bjoern Voss, an analyst with M.M. Warburg in Hamburg, Germany, said in a telephone interview.
Continental Chief Executive Officer Karl-Thomas Neumann aims to submit a plan by Aug. 1 and the alternatives include merging operations of the two auto-parts makers. Schaeffler is based in Herzogenaurach, Germany.
“It will be the end of July before we can say anything about our future relationship with Schaeffler,” Neumann said during a conference in Frankfurt today.
Citigroup Inc. and Goldman Sachs Group Inc. were lead arrangers of the original loan, which includes a change of control provision that would allow the banks to demand repayment in the event of a takeover. About 50 banks currently hold Continental debt, according to the people.Schaeffler, which makes transmission parts and bearings for cars, planes and windmills, obtained derivatives contracts and made what was then a low-ball bid for Continental, aiming to secure a stake of 30 percent to 50 percent. Instead, 82.4 percent of Continental stock was tendered as investors sold in response to collapsing markets.
Commerzbank AG, Royal Bank of Scotland Group Plc, UBS AG, Landesbank Baden-Wuerttemberg and UniCredit SpA’s HVB Group unit financed Schaeffler’s purchase of Continental, which was completed in January.
“Schaeffler’s banks have few options and will likely have to do a debt-for-equity swap, leaving Schaeffler no longer entirely independent,” M.M. Warburg’s Voss said.
Seems like the merger is al but done - now if only people were to start using Conti's products despite the complete collapse of the auto sector, the banks may really have no reason to worry any more. One can bet lawyers are chomping at the bit for this one: if recent (lack of) M&A transactions are any indication, someone in this drama will end up paying a boatload of money to settle this overhyped merger, put together at the very peak of the auto market.