Continental AG Transforms to Keep Pace With Sweeping Auto Change

(Bloomberg) -- Continental AG has become the latest in a line of companies to announce sweeping changes to keep pace with the auto industry’s transformation to an electric, self-driving future.

The world’s second-largest car-parts maker has been discussing possible steps for months on how to best move forward, and is set to follow competitors like Delphi Automotive and Autoliv AB that have split themselves up. In Continental’s case, the company plans to spin off the powertrain unit and is contemplating a move into battery-cell making and selling part of the rubber division.

“There are huge question marks around the timing of the transformation from combustion engines to electric cars, or fuel cells, or synthetic fuels,” Chief Executive Officer Elmar Degenhart said Wednesday on a call with reporters. “That’s why it’s prudent to make ourselves more flexible now.”

The German company plans to carve out the powertrain division, whose products include parts for combustion engines, early next year into a separate entity. It’ll keep majority control in any share sale that could happen as soon as mid-2019, Hanover-based Continental said. The supervisory board must still sign off on the plan at a meeting later this month.

Companies are responding to new pressures and record investment demands to develop new technologies, particularly for electric cars. Daimler AG, the world’s biggest producer of luxury cars and commercial vehicles, is also pursuing a plan that would hand greater autonomy to its individual units, to help speed up decision-making and keep new competitors like Uber Technologies Inc. at bay.

Continental climbed as much as 4.5 percent and traded 1.1 percent higher at 204.20 euros as of 4:31 p.m. in Frankfurt.

Generate Cash

Listing part of the powertrain division would generate cash to invest in growth areas such as electric vehicles and self-driving features. The unit generated 7.7 billion euros ($8.9 billion) in sales last year and employed more than 40,000 people. The overhaul will also reorganize some of the company’s other units. Bloomberg first broke news of the carve out in January.

Any decision on a plan to make battery cells would come after 2020, and would target future solid-state technology that’s not currently still in development. Separately, Degenhart said a partial share sale of a minority stake in the rubber division -- Continental also makes tires -- could help fund potential acquisitions that exceed the company’s financial firepower.

Continental’s last acquisition exceeding 1 billion euros was the purchases of Veyance Technologies Inc. for 1.4 billion euros announced in 2014.

Brokering the company’s split is another achievement for Chairman Wolfgang Reitzle, who’s separately arranging a merger for industrial-gas maker Linde AG, where he also leads the supervisory board. He was brought in to Continental in 2009 after an aggressive stake purchase by the billionaire Schaeffler family triggered departures of top management.

Continental has been looking at changes to its corporate structure since late last year. Degenhart outlined a potential project in April to separate a portion of the business that makes engines and transmissions to give it “more free space.” The powertrain division needs to be especially flexible as more than half of its revenue is affected by the auto industry’s looming shift toward electric cars, he said at the time.

Family Favor

The family holding in Continental is controlled by Maria Elisabeth Schaeffler and her son Georg Schaeffler, who own industrial-bearings manufacturer Schaeffler AG. While Reitzle and Degenhart advocated for an IPO for the powertrain operation, the Schaefflers initially favored a spin-off. That option would have given the clan the ability to generate funds from selling stock in the unit once it’s listed, while keeping their Continental stake at 46 percent.

The Schaeffler family’s strategy at Continental is being closely watched. Maria Elisabeth, the widow of Schaeffler AG’s co-founder failed to attend at least 75 percent of Continental’s supervisory board meetings last year, which Advisory firm Institutional Shareholder Services Inc. in April criticized. She also didn’t show up at the April annual meeting, where other investors demanded more clarity on the reorganization plans. The main representative of the Schaeffler family in talks about Continental’s future structure is Georg, a U.S.-based lawyer.

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