Reviewing the Demerger Arbitrage Setup for Continental AG

April 18, 2025

CON: €65

Market Cap:€13BN

Enterprise Value: €19.2BN

Summary

Continental AG (XTRA: CON) has been high on my watch list for the past 3 months. Why? Because Continental is going to be spinning off its auto parts business in late 2025 and it looks like the transaction will create shareholder value. I was very close to buying the stock recently. But two things are holding me back for now: 1) Tariff uncertainty (Continental is exposed as a EU company and an auto parts company) and 2) Concern whether the spin-off will proceed given macro uncertainty.

Background

On March 12, 2025, Continental AG’s (XTRA: CON) Supervisory Board approved the spin-off of its Automotive group sector, aiming to enhance agility and value creation within the company. The new entity is scheduled for a public listing on the Frankfurt Stock Exchange by September 2025.

Financial Structure and Share Allocation:

  • Initial Funding: The Automotive spin-off will commence with €1.5 billion in cash and access to a €2.5 billion credit facility, ensuring a robust financial foundation.
  • Share Distribution: Shareholders will receive one share in the new Automotive company for every two Continental shares held, facilitating a smooth transition.

Dividend Policies Post Spin-Off:

  • Continental AG: Plans to distribute 40% to 60% of consolidated net income as dividends, an increase from the previous 20% to 40% range.
  • Automotive Entity: Aims for a dividend payout between 10% and 30% of net income, aligning with industry standards.

Upcoming Milestones:

  • Capital Market Days: Scheduled for June 24, 2025, for the Automotive company, and June 25, 2025, for Continental’s Tires and ContiTech sectors, these events will outline short- and mid-term targets for both entities.
  • Shareholder Approval: The spin-off awaits approval from Continental’s Annual Shareholders’ Meeting on April 25, 2025.

Will this transaction unlock value?

I think it should.

Currently, Continental has a market cap of €13BN euros and an enterprise value of €19.2BN.

The Autoparts Spin-off

The autoparts spin-off should trade inline with peers (0.3x to 0.4x revenue, 6.9x to 8.3x EBIT) inline with peers.

Assuming the spin-off deserves to trade inline with peers, it’s worth €3.1BN to €8.0BN

The Tire Business

The tire business should trade inline with peers (0.9x to 1.1x revenue, 6.5x to 7.0x EBIT) inline with peers.

Assuming the tire business spin-off deserves to trade inline with peers, it’s worth €11.7BN to €16.0BN.

ContiTech

ContiTech doesn’t have any public peers, but I’m assuming it deserves to trade between the autoparts business and the tire business (it has higher margins and less capital intensity than the autoparts business).

Assuming this is reasonable, ContiTech is worth €2.5BN to €5.0BN.

Putting It All Together

Using the assumptions that I’ve shared above, Continental A.G. is worth €17.3BN to €29.1BN on an enterprise value basis. This implies 51% upside potential vs. 10% downside potential on an EV basis and 75% upside potential vs. 15% downside potential on a market cap basis.

Tariffs

Tariff potential is one important factor holding me back from buying CON shares.

The EU is currently in negotiations with the U.S. to address tariffs imposed by President Donald Trump. These include a 25% tariff on EU steel, aluminum, and automobiles. In response, the EU has announced retaliatory tariffs of 25% on €21 billion worth of American goods, targeting products like soybeans, beef, yachts, and wood products. These measures are set to take effect between May 15 and December 1, 2025 .​

North America represents 26% of sales. That includes Canada and Mexico so let’s assume US sales are maybe 23% of sales.

Here’s what management said about tariffs on the last earnings call.

 

Will the Spin-off Take Place?

My last concern is whether the spin-off will proceed.

My sense is that it will, but that it could be delayed given macro uncertainty and the tariff situation.

As such, I’m not quite ready to buy Continental, but it remains high on my watch list and could be a recommendation in the future.

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