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Continental deal turns good for Germany's Schaeffler family

Maria-Elisabeth Schaeffler was moved to tears when 8,000 Schaeffler employees gathered near the family-controlled company's headquarters in 2009 to demand the German government help avert the ballbearing maker's collapse.

The previous year, the matriarch and her son Georg had launched Schaeffler's audacious debt-financed takeover of Continental, the Dax-listed tyre and auto-parts supplier whose sales were three times larger.

But when Lehman Brothers failed in 2008, Conti's share price plummeted, prompting many more of its shareholders to accept Schaeffler's offer than it had anticipated. Privately-held Schaeffler was left holding 90 per cent of Conti's stock and together the two companies were burdened with an unsustainable €22bn debt load.

More than six years later, after a deft financial restructuring but no government bailout, the Schaeffler family's position has been transformed. The Schaefflers not only remain in control of Conti but are wealthier than ever before - the family's 46 per cent stake in the tyremaker is worth €19.7bn, partly because of investor excitement at the company's expertise in driverless vehicle technology.

"It's a remarkable story - having nearly lost everything [the family] are back to the double-digit billions," says a person close to the family.

In March, Forbes magazine estimated Georg Schaeffler's fortune at $26.3bn, which would make him Germany's richest person. He owns 80 per cent of Schaeffler while his mother owns 20 per cent.

Together Schaeffler and Conti have some €47bn in annual revenues and 270,000 employees. The automotive empire controlled by the Schaeffler family is rivalled in Germany only by Quandts at BMW, and the Porsche and Piech families at Volkswagen.

Like many German companies, Schaeffler's success is built on the precision engineering of seemingly innocuous but vital industrial components.

Its bearings support the US space shuttle and the Airbus A380 superjumbo, and a typical car contains around 60 Schaeffler friction-reducing components. Schaeffler ranks second in Germany for patent applications behind Bosch.

These innovations and Schaeffler's lean production processes have made it highly profitable - in 2014 it reported a 12.6 per cent operating margin.

However, this industrial prowess risked being undone by the large debt load Schaeffler incurred when taking over Conti.

When he arrived from Dresdner Bank in 2009 to serve as Schaeffler's chief financial officer, Klaus Rosenfeld began intensive talks to try to restructure those debts.

Schaeffler gradually sold some Conti stock but did not want to surrender control. That forced Schaeffler to embrace the bond markets, which entailed much improved financial transparency, corporate governance and communication than the company was accustomed to.

Until 2010 Schaeffler published scarcely any financial information and it had never held a press conference.

By gradually swapping all its bank loans for bonds, Schaeffler has extended debt maturities and its interest payments bill in 2015 is set to be about half the level it was in 2010, when adjusted for one-time refinancing costs.

"It was decisive for Schaeffler that Rosenfeld was able to negotiate with the banks - it was essential to saving the company," says a former manager.

Nevertheless, Schaeffler still has about €10bn of gross debt, which is split between its holding company and the operating subsidiary. Schaeffler's net debt was €6.2bn at the end of March, and the company is rated three notches below investment grade by Moody's, the credit rating agency.

Moody's cautioned in October that "absent of any external deleveraging transaction, [Schaeffler's] leverage is unlikely to materially improve just from internally generated cash flows".

Last year Schaeffler transferred the Conti stake to its holding company level, which would make it easier for investors to value the privately-held group's operating subsidiary in the event of a stock market listing.

A German banker says: "It's all about creating consistency and making the company ready for the equity capital markets - everyone knows that if the market turns and Conti's share price goes down, Schaeffler is still holding too much debt."

However, at the group's annual results presentation in March Mr Rosenfeld - who was promoted to chief executive last year - insisted Schaeffler was under no pressure to pursue a listing, nor had it mandated banks to prepare such a move. Schaeffler has sufficient resources to fund investments, he said, and will use cash flows to cut gross debt at the operating subsidiary by €1bn by 2018.

Ultimately only the Schaeffler family can decide whether or not the group should become a public company, but their views on the matter are unclear. The family declined to speak to the Financial Times.

Mr Schaeffler, chairman of the Schaeffler group's supervisory board, divides his time between Germany and the US, where he worked for many years as a lawyer and is better able to escape the media.

The 50-year-old is taking a more active role at the company but has remained in the shadow of his more gregarious mother.

"He is growing into his role but doesn't have the confidence to make quick decisions and rather tends to worry over the minutiae," says a person close to the family. "He will not do anything his mother doesn't want."

Mrs Schaeffler, deputy chair of the Schaeffler group, "understands the corporate culture and is a great marketer for the company - it's hard for [Martin] Winterkorn [the chief executive] at Volkswagen to say no to her," says the person close to the family, referring to how VW is one of Schaeffler's most important customers.

However, she told Handelsblatt in January that "the company is my life" and she was "shaken" at the very suggestion of selling it. Investors hoping to purchase a stake in the ballbearing maker may therefore need to be patient.