Continental breakup tracks novel M&A route
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Neil Unmack
LONDON, Aug 6 (Reuters Breakingviews) -The planned breakup of Continental CONG.DE may pave the way for a new M&A route. The 11 billion euro manufacturer is considering spinning off its struggling car parts unit, a move that will highlight the value in its healthier tyres division. The radical split could also entice suitors for both businesses.
Continental, whose largest shareholder is Germany’s Schaeffler family, is undertaking radical self-help. After years of market speculation, the industrial group said on Monday it will soon decide to separately list the unit that makes electronic and braking systems for cars. That business has struggled due to the global chip crisis and broader auto sector challenges. It was lossmaking in 2022 and last year scraped out a 1.91% EBIT margin.
Carving out that division should help investors focus on the core tyre business, which last year churned out an EBIT margin of nearly 14%. Assume the auto division is valued at 2 times its expected 2025 EBITDA, in line with peer Valeo VLOF.PA, and it could be worth some 4 billion euros, using Visible Alpha forecasts.
If the tyre business and technology unit are worth 5 and 3 times their 2025 EBITDA respectively, reflecting peer Michelin’s MICP.PA multiple and estimates from Bernstein analysts, then they could be worth nearly 18 billion euros. Add it all up, take off debt and minority interests, and Continental’s equity could be worth around 14 billion euros, or 25% above the current market capitalisation.
The move is also a response to the broader challenges in the auto sector. Carmakers are facing Chinese competition and a costly transition to electric vehicles. That will make them more likely to squeeze suppliers like Continental. And the shift to software-based cars with infotainment and self-driving features may mean carmakers bring tech development business back in house. Continental’s hope is that an independent car parts group will be more agile to compete in such a backdrop, for example by forging technology partnerships.
That could mean, although Continental has not said as much, mergers and acquisitions, as an independent auto unit will be easier to merge with a rival. There are precedents: Vitesco, the powertrain division spun out of Continental in 2021, has recently been absorbed by industrial conglomerate Schaeffler SHA_p.DE, whose largest shareholders is also the eponymous family. And the sector is consolidating: car-parts maker Faurecia, for example, acquired Hella in 2022. The spun off Continental business would be smaller and less profitable than rival Valeo, and would arguably be better housed in a bigger auto supplier.
The move could also have implications for the remaining tyres business. In 1990, Italian group Pirelli’s PIRC.MI hostile attempt to buy it failed. The unit has thrived since then. But without the challenged auto division, what’s left of Continental would be an easier partner. This bold breakup may have an M&A coda.
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CONTEXT NEWS
German industrial group Continental said on Aug. 5 it would consider spinning off its car parts business.
The division, which generated sales of 20 billion euros in 2023, will be listed in Germany in 2025 if the company decides to go ahead with the separation, Continental said.
Continental shares were up 2.1% at 54.32 euros by 0815 GMT.
Editing by Lisa Jucca and Streisand Neto
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