Continental seeks to expand beyond auto business with U.S. acquisition

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FRANKFURT (Bloomberg) -- Continental agreed to buy Veyance Technologies from Carlyle Group for about 1.4 billion euros ($1.9 billion) to expand beyond the auto business.

Continental, based in Germany, expects the purchase to boost profit of its ContiTech unit immediately upon completion. Veyance Technologies, based in Ohio, makes industrial hoses and conveyor belts.

The deal can be financed from available cash and credit lines and is expected to close by the beginning of the fourth quarter.

"This acquisition will enable Continental to come a step closer to its strategic goal of increasing further our proportion of sales to industrial customers and private end users," CEO Elmar Degenhart said in a statement on Monday. "The planned integration of Veyance into our ContiTech division will expand our position in rubber and plastics technologies on a worldwide basis."

Continental, Europe's No. 2 auto parts supplier and also the region's second-largest tiremaker, is targeting a fifth consecutive year of record sales in 2014 after deliveries of parking-assistance systems and braking electronics helped lift sales last year.

The ContiTech unit, which makes hoses, conveyor belts and artificial leather, employs 29,700 people and generated about 3.9 billion euros in sales last year, or about 12 percent of the group's revenue.

Combined with Veyance, the Continental unit will have sales of about 5.4 billion euros and employ 39,000 people globally.

"The acquisition can be beneficial for Continental to become more independent of auto manufacturers and the tire business," said Frank Schwope, a Germany-based analyst with NordLB. "Continental has reduced debt as planned and now has the opportunity to invest again.

Veyance, previously known as Goodyear Engineered Products, was bought by Carlyle for $1.5 billion in 2007. It generates about half its sales in the United States.

The combination of the two companies is expected to generate savings of about 75 million euros over four years, ContiTech chief Heinz-Gerhard Wente said on a conference call.

Continental intends to increase business to industrial customers to 40 percent of group sales from 28 percent currently. After the acquisition, the rate will rise to 32 percent, ContiTech's Wente said.

Credit impact

The company narrowed net debt to about 4.6 billion euros at the end of 2013 from 5.32 billion euros a year earlier. Standard & Poor's, Fitch Ratings and Moody's Investors Service all raised Continental's credit rating last year to investment grade after borrowings stemming from the takeover of the former Siemens car-electronics unit VDO in 2007 were reduced.

Fitch said on Monday that the acquisition of Veyance will not have an immediate impact on Continental's ratings. "The negative effect on credit metrics is modest and should be offset by the mildly positive impact on the group's business profile," the credit-rating company said.

Continental aims to outpace growth in the auto market by focusing on components that help reduce vehicle emissions, increase auto safety and facilitate in-car communication links and expanding sales to other manufacturers.

Continental in January forecast that 2014 sales will grow about 5 percent this year, more than double a 2.4 percent expansion in global car production.

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