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Auto-suppliers need to refuel: a slump in car production is leading to distress in Germany's substantial auto-supplier space. Privately held companies want to find liquidity through minority stake sales but deals will only materialise where the technology is right.

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This time last year, Schaeffler grabbed the headlines with its 12.1bn [euro] takeover bid for larger rival Continental, a tyre and electronic auto-parts maker. Family-owned ball bearings maker Schaeffler raised 11bn [euro] of debt to finance the deal.

By the time a revised offer was accepted by Continental shareholders in September, the outlook for auto-suppliers had fundamentally changed for the worse. The nosedive in global car sales pushed German automakers to cut back production by 10% in October 2008 alone, according to VDA, the German car manufacturing industry body.

Although sales of cars have since benefited from various European car scrappage incentive schemes, production has been on a downward spiral since.

Car production in Germany slumped by 30% in the first quarter of the year and by 18% in the second quarter. July's figures pointed to a stabilisation in the decline, production slipped by just 5% in that month, but for many of Germany's auto-suppliers it may already be too late.

The impact of the extent of the slowdown on the auto-supply space has been disastrous, with many companies failing into insolvency and a battle for survival the focus for many others.

At the time of Schaeffler's initial approach last year, Continental's board called the move "highly opportunistic".

Today, as both companies have been left reeling from the impact of the slump in demand for new cars and car parts, rather than opportunistic, the deal looks catastrophically ill-timed and value-destructive for the ball-bearings maker. It offered 75 [euro] per share in Continental and the shares are now trading at 22 [euro].

The debt-burden that Schaeffler took on has led lenders to threaten the Schaeffler family's ownership of the company. Also, the merger originally envisaged by Schaeffler looks farther away, after Continental gained approval to raise 1.5bn [euro] of new equity in a capital-raising that will dilute Schaeffler's stake.

The fate of two of Germany's iconic suppliers is being mirrored lower down the value chain, with distress the defining feature of M&A in this sector.

Fire-fighting

A study by Roland Berger Strategy Consultants catalogues the pain in Germany's auto-supply space from November 2008 to mid-July 2009 (see table 1). Listing only the more significant insolvencies, Roland Berger estimates there could be between 100 and 150 more over the next six months if car sales don't improve.

While government scrappage schemes have boosted sales, there is widespread acceptance that this is a temporary bubble that won't be sustained beyond 2009 and that is masking the difficulty of over-capacity in Europe's car market. Analysts estimate that Europe has about 35% more production capacity than it requires.

For the suppliers that continue to operate, the extent of the downturn means many them are seeking additional funds to ensure their survival.

"Some companies are going into this crisis with almost zero debt," says Andreas Kolsch, managing director, head of industrials and automotive, at UniCredit Group in Munich. "They can actively consolidate the market. They will also likely be able to raise debt now to do this."

"We've got a number of...