LONDON: Continental could be the unintended trigger for mergers and acquisitions in the auto supply industry. The $ 20 billion German mobility company has confirmed that it wants to divest its powertrain division, dubbed Vitesco, which manufactures engines.
The latter would be a natural companion of $ 4.9 billion to his German counterpart Schaeffler. Faced with a prolonged slowdown, competitors like Valeo, listed in Paris, could soon follow suit.
If German automakers have had a tough pandemic, consider the industry’s second-largest supplier, like Volkswagen and Daimler. Continental collapsed to a half-yearly net loss of 448 million euros on Wednesday due to the brutal sales of Covid-19. Stocks have lost nearly a quarter of their value this year, underperforming the benchmark STOXX Europe 600 Automobiles & Parts.
Faced with the decline in demand for vehicles, boss Elmar Degenhart wants to separate from Vitesco, which manufactures engines and sensors. Shareholders would receive an individual share of the new company via a separate listing, likely next year. This would allow Degenhart to focus on the higher margin electronics and automotive safety businesses. For its part, Vitesco could focus on building propulsion systems for battery cars, the number of which, helped by generous public subsidies in China, Germany and France, is expected to explode.
An enterprise value of 7 times EBITDA – around the average of its peers Valeo and Hella – implies that Vitesco could be worth € 3.7 billion, based on its latest financial results and using data from Refinitiv. This would make an attractive partner for Frankfurt-listed Schaeffler, which also manufactures engines.
If a € 8bn merger between the two reduced € 365m in costs – roughly 2.5% of their combined spend – then the synergies could be worth € 2.7bn when taxed and capitalized. The fact that the two companies are controlled by the Schaeffler family, which owns 46% of Continental’s capital and a majority of Schaeffler, gives additional impetus.
Given the need to continuously invest in battery-powered vehicle technology, a union would increase cost pressure from competitors, prompting Valeo and Faurecia to seek their own partners. Continental’s expected fallout could be the trigger for overdue automatic consolidation.
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