Continental weighs car parts spinoff in major revamp

HANOVER: Continental AG may separate its struggling car parts business from the more successful tyres operations in what would be the biggest restructuring in the German company’s 152-year history.

The move may include a spinoff and full listing, with a decision expected by the end of the year.

The unit makes products including brakes and automated driving systems and accounts for roughly half of group sales. Continental would keep its profitable tyres and ContiTech businesses.

Parts suppliers are under pressure as automakers temper production after demand for electric vehicles has slowed. Continental had been reviewing possible divestments and partnerships at its auto unit that’s fallen behind peers.

ZF Friedrichshafen AG plans to eliminate about a quarter of its workforce in Germany by 2028 to deal with the EV shift.

The announcement shows that one of Europe’s largest automotive suppliers is willing to pursue a deeper restructuring to revive profits.

Investors have criticised its conglomerate structure for some time as the cost synergies between its sprawling operations weren’t always clear.

Chairman Wolfgang Reitzle - a seasoned industry executive - in December said that Continental is "open for anything” to bolster the company.

The automotive business - which employs around 100,000 people and generated sales of around €20.3 billion (US$22.3 billion) in the past fiscal year - has been struggling with significant investment requirements and waning demand.

Higher interest rates are weighing on car buying, and auto sales remain below expectations in China, where German brands are struggling to keep up with local competition led by BYD Co.

The goal of the restructuring is to "fully exploit the value and growth potential of the two then separate groups,” Hanover-based Continental said Monday, adding that it will make a decision in the fourth quarter, with a target to finalize any move by the end of next year.

"This would be the most exhaustive corporate action proposed to date, but has clear capital markets logic,” Jefferies analysts led by Michael Aspinall said in a note, adding that a spinoff would produce a "pure-play” automotive business such as Forvia, Valeo or Schaeffler and a tyre company similar to Michelin.

Continental was best known for making tyres until it started building up an auto components portfolio in the late 1990s, when it bought a brake maker and then in 2007 Siemens AG’s automotive unit for €11.4 billion.

More recently, profits have started to sag. It has faced scrutiny as part of its role in the diesel emissions scandal, and in April was fined €100 million for failing to prevent that its staff participated.

The manufacturer is being squeezed by higher energy and labour costs as well as tough price renegotiations with its clients.

Continental earlier this year said the benefit from recent cost cuts began to show in the second quarter, and will have a greater impact on profit in the second half of the year.

Continental’s tyres unit and the ContiTech business - which focuses on industrial clients - together employ around 100,000 people. They generated sales of around €14 billion and €6.8 billion in the past fiscal year, respectively.

Any major restructuring requires the backing of the powerful billionaire Schaeffler family behind Continental and Schaeffler AG that is reshaping its auto-parts empire.

Continental shareholders would receive stock in an independently listed automotive entity in proportion to their holding in the main company. The company is due to report quarterly earnings on Wednesday.