Schaeffler Group completed the purchase of Continental AG, Europe’s second-largest car-parts maker, adding to its vehicle-component business and piling on debt as a global recession plunges the auto industry into crisis.

Schaeffler, the world’s second-biggest manufacturer of ball- bearings, owns 49.9 percent of Continental stock and has shifted shares tendered in excess of that amount to banks, the Herzogenaurach, Germany-based company said today in a statement.

“The conclusion of the takeover clears the way for integrating the companies quickly and in a pragmatic manner,” Chief Executive Officer Juergen Geissinger said in the statement. “Against the backdrop of the financial crisis and the market changes in the automotive industry, both companies are facing great challenges and have no time to lose.”

Schaeffler gained control of 90.2 percent of Hanover, Germany-based Continental in September after investors owning 82.4 percent of the stock accepted its 75 euro-a-share offer, adding to a holding of 7.78 percent. Schaeffler pledged to keep a stake of just under 50 percent for four years as part of an agreement that resolved a dispute with Continental management over its 12.7 billion-euro ($17.4 billion) bid.

Car Markets Shrink

The companies’ combined car-parts operations would overtake Stuttgart, Germany-based Robert Bosch GmbH as the world’s biggest automotive supplier. At the same time, their biggest markets are at the worst levels in almost two decades. Auto deliveries in Germany fell 2 percent in 2008 to less than at any time since the country’s reunification in 1990, while the U.S. car market contracted 18 percent to a 16-year low.

Continental rose 1.55 euros, or 5.3 percent, to 31.04 euros in Frankfurt trading. The stock has dropped 60 percent in the past 12 months. Schaeffler, which ranks second worldwide to Gothenburg, Sweden-based SKF AB in making ball-bearings, is owned by billionaire Maria-Elisabeth Schaeffler and her son Georg and isn’t traded.

Schaeffler, with 2007 sales of 8.9 billion euros, may have taken on more than 10 billion euros in debt to finance the purchase. In the offer document, the company estimated a full takeover would result in a need to borrow 11.9 billion euros from its bankers, which include Royal Bank of Scotland Group Plc, UBS AG and Commerzbank AG. Schaeffler didn’t specify the amount it borrowed to complete the deal.

Debt ‘Challenge’

“For a company Schaeffler’s size, it’s certainly a challenge to manage that much debt in the current economic climate,” said Bjoern Voss, a Hamburg-based analyst with M.M. Warburg. “The next two years will be decisive.”

The extent of Schaeffler’s debt burden will depend on the structure of the loans and the amount of money that the company’s owners are able to provide, Voss said.

Schaeffler’s estimate of 899 million euros in interest expenses in the first year of the deal would suck up 84 percent of operating profit, based on first-quarter 2008 figures reported in the offer Since then, car markets have deteriorated, while Schaeffler raised the bid to 75 euros a share from 70.12 euros.

Schaeffler had originally planned to make a low-ball bid for Continental and secure a stake of 30 percent to 50 percent. The company held cash-settled options that ensured it would achieve the desired stake. Investors, spooked by the global credit crunch and its effects on the auto industry, jumped on the offer.

Limits to Control

Continental, which has 10.8 billion euros in debt, said today in a statement that the investor agreement is now in “full effect.” In addition to limits on the stake, Schaeffler agreed in August to support Continental’s strategy, not increase Continental’s debt and not force asset sales. Tensions between the two companies became strained a month ago after CEO Geissinger wrote to Continental’s bankers.

Robert Heym, a Munich-based partner with law firm Reed Smith, said any move by Schaeffler to breach the agreement by expanding its stake wouldn’t make sense because that could force a renegotiation of loans owed by Continental.

“This would presumably cause material commercial issues because new financing terms would be obviously less favorable in the current economic environment,” Heym said in an e-mail.

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