Continental examines automotive business spinoff amid industry's software shift

Continental is examining a spinoff and subsequent listing of its automotive unit on the Frankfurt stock exchange.

With the move, Continental would effectively be halved: In 2023, the automotive division had sales of €20.3 billion ($22.31 billion) and about 100,000 employees, while its ContiTech, tire and plastics businesses, had sales of €20.8 billion and a similar number of employees.

The automotive unit makes products including brakes and automated driving systems.

"The aim of a spinoff would be to fully exploit the value and growth potential of the two then separate groups," Continental said in a statement on Aug. 5.

The automotive part of ContiTech would be carved out in a spin-off, and previously announced plans to carve out the User Experience division within automotive would be put on ice.

Continental has been struggling with low profitability in its automotive business for some time. It is currently overhauling the unit, including cutting more than 7,000 jobs worldwide and closing some sites.

The supplier is under pressure to cut costs while having to invest in new technologies as the industry shifts to software-defined electric vehicles.

Continental is also being squeezed by higher energy and labor costs as well as tough price renegotiations with its clients. It said earlier this year that 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.

CEO Nikolai Setzer said disruptive changes in the industry such as the software-driven technology transformation and sharply fluctuating regional developments led Continental to aim to divide the supplier into two independent companies.

Shareholders would receive shares in the new company in proportion to their Continental holding as part of the spin-off, as with the spin-off of Vitesco Technologies in 2021, the supplier said.

Philipp von Hirschheydt, current head of the division, would lead the spun-off company.

The contract manufacturing division would also be part of the transaction, Continental said.

A spin-off could be submitted for approval at the annual shareholders' meeting next April, with the unit listed by the end of next year, Continental said, adding that its executive board is expected to decide on the spinoff in the fourth quarter.

The required steps for implementing a spin-off are already being prepared, it said.

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

Historic move

The spinoff would be the biggest restructuring in the German company's 152-year history.

Continental was best known for making tires until it started building up an auto components portfolio in the late 1990s, when it bought a brake maker and then in 2007 Siemens's automotive unit for €11.4 billion ($12.4 billion at current exchange rates). 

More recently, profits have started to sag. It has faced scrutiny as part of its role in the diesel emissions scandal. In April, the company was fined €100 million for failing to prevent that its staff participated in the scam via selling more than 12 million engine control units that automakers, including Volkswagen Group, used to manipulate emissions.

'Clear capital markets logic'

Investors have criticized Continental's conglomerate structure for some time as the cost synergies between its sprawling operations were not always clear.

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

Wolfgang Reitzle, chairman of the supervisory board, threw his support behind the spinoff plans.

"As a strong, independent entity, Automotive would be able to harness its full potential for creating value," he said in a statement. "In addition, investors would be able to invest in a company focused specifically on automotive electronics," he added.

Continental ranked No. 8 in the 2023 Automotive News List of Global suppliers.

Reuters and Bloomberg contributed to this report