Continental Sticks to Powertrain IPO Plan Amid Profit Slump

(Bloomberg) -- Continental AG is moving ahead with plans to carve out its powertrain division while postponing a final decision, as the German auto-parts maker adapts to the disruptive and costly shift to self-driving, electric cars.

Preparations for a partial initial public offering of the unit, which makes components for combustion and electric-powered vehicles, will be completed toward the end of the second half, the Hanover-based company said Friday in a statement. The unit is valued at as much as 5 billion euros ($5.6 billion).

The project is taking longer than expected. Continental now sees a potential listing for the division -- dubbed Vitesco Technologies -- in 2020, depending on conditions. It earlier targeted a possible IPO in the second half of this year.

After Volkswagen AG put on hold plans to list its heavy trucks unit Traton SE in March, Continental’s efforts to follow through on the powertrain separation were greeted warmly by investors. The carve-out will cost Continental 350 million euros and trigger a negative tax hit of another 100 million euros.

Chief Executive Officer Elmar Degenhart stressed the strategic importance of the company’s reorganization into three divisions at Continental’s annual general meeting in Hanover. The manufacturer must become more agile to navigate a fundamental technology shift, he said. A separate listing would allow the powertrain unit to raise fresh funds on its own if needed.

Degenhart reiterated the company will retain a majority stake in the unit “in the mid- and long-term.” It’s considering selling a stake of as much as 25 percent, Chief Financial Officer Wolfgang Schaefer told investors. The unit generated 11 billion euros in orders last year, with around 2 billion euros related to electric mobility.

The shares rose as much as 3.6 percent and were up 2.7 percent at 4:11 p.m. in Frankfurt. The stock has declined by about a third over the past 12 months, paring the parts-maker’s value to 30.6 billion euros.

Degenhart said Continental already flagged some years ago the potential option for a separation of the high-margin rubber unit, but he told shareholders there’s “currently no need” for such a step. The company is in robust financial health and has sufficient financial muscle for acquisitions of up to 5 billion euros, he said.

The urgency for Continental’s strategic overhaul was evident in the first quarter. Operating profit dropped 17 percent to 884 million euros as global car production declined more than 6 percent even with demands to invest in new technology intensifying. With sales flat at 11 billion euros, the profit margin narrowed to 8.1 percent from 9.7 percent in the previous year.

Continental’s struggles aren’t isolated as manufacturers at all levels of the auto industry grapple with deep technological changes, trade disputes and economic uncertainty. Mercedes-Benz maker Daimler AG said earlier Friday its financial targets have become harder to achieve after a tough start to the year.

Continental expects markets to improve in the second half of the year and stuck to a forecast of lower operating return on sales for 2019. The company’s margin is set to drop to between 8 percent and 9 percent, after 9.3 percent last year.

Anticipating business to improve in the second half of the year “is far from guaranteed, we believe, given continued weakness” in European and Chinese markets, Bloomberg Intelligence analyst Michael Dean said in a report.

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