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CONSUMER CYCLICALS: Continental (CONGR Baa2/BBB/BBB): Potential Spinoff

CONSUMER CYCLICALS
  • Continental announced yesterday it’s evaluating a spinoff to shareholders of the Automotive and Contract Manufacturing divisions as a separate company. With the share price at the lowest since late 2022, it seems management hope to unlock value via a profit multiple for the tyres business while framing the EV exposed SpinCo as a growth story.
  • Those divisions generated 50% of sales but only 25% of group EBITDA last year. 
  • There are parallels with Vitesco; it was spun off from Continental in 2021 with net cash, increasing leverage at the remaining business. Fitch viewed the deal as credit neutral due to improved profitability.
  • Our base case is for a similar structure should this move go ahead. The lower margin SpinCo will have lower debt capacity and we would expect Continental leverage to increase ex post, offset by higher group margins. It remains to be seen what view the agencies will take of reduced diversification, but overall unchanged ratings seem the most likely outcome.
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