Continental AG, Europe’s second- biggest car-parts maker, may endorse plans to raise 1.5 billion euros ($2.1 billion) in a share sale, defying majority owner Schaeffler Group and building up cash to help pay back debt.

Half of Continental’s supervisory board hails from unions that favor a capital increase to safeguard the company’s survival. The 20-member board meets in Hannover, Germany, today to decide whether to remain apart from Schaeffler or combine operations amid the worst auto slump since World War II.

“It’ll be difficult for Schaeffler to secure a majority,” said Hans-Peter Wodniok, an analyst at Fairesearch in Frankfurt. “The workers will most certainly vote against Schaeffler and therefore for a capital increase. Continental will face enormous financial problems if it doesn’t succeed.”

Continental, also Europe’s second-largest tiremaker, needs fresh funding in order to meet 4.2 billion euros in loan payments due over the next 13 months. Shareholders have already given authorization to issue 58.6 million new shares that would raise as much as 1.5 billion euros at current prices.

Schaeffler, with only five board seats, is also opposed by a group of lenders which holds 50 percent of Continental debt and is pressing for the capital increase, three people familiar with the situation said. They declined to be identified because the talks are private.

Schaeffler racked up 11 billion euros of debt from buying Continental as it sought to challenge Robert Bosch GmbH as the biggest auto components supplier. Pushing back a merger would be a blow to the ball-bearing maker’s ambitions as it seeks to cut labor costs by 250 million euros this year to soften the impact of an anticipated 15 percent drop in revenue.

Diluted Holding

After a share sale, Schaeffler’s stake may be diluted from the current 90 percent to as low as 66 percent. The family-owned company’s votes in Continental are already limited to less than 50 percent by the takeover agreement.

During the meeting at Continental’s headquarters, directors probably will commit to a course for the company. The options are supporting a merger or calling for the manufacturers to operate separately, the people said.

With a combined 22 billion euros in debt, financing a merger may not be feasible, said Michael Tyndall, an analyst with Nomura Securities in London. “The idea of the merger makes zero sense and doesn’t look like it’s on the table anymore.”

Continental needs to finance debt payments of 800 million euros next month and 3.5 billion euros in August 2010.

Antje Lewe, a spokeswoman for Continental, and Schaeffler’s Detlef Sieverdingbeck declined to comment before the meeting.

Casting Vote

Schaeffler’s appointees on Continental’s board include Chairman Rolf Koerfer, a partner at Allen & Overy LLP, the law firm that represents the closely-held company. Koerfer could cast a deciding vote if the sides are deadlocked.

The other Schaeffler representatives are Chief Executive Officer Juergen Geissinger, Chief Financial Officer Klaus Rosenfeld, and the two owners: the founder’s widow Maria- Elisabeth Schaeffler and their son Georg.

Continental CEO Karl-Thomas Neumann said on July 20 that he expects the board to make “clear, direction-setting decisions” at the meeting to address the company’s “paralysis due to its uncertain future.”

Neumann said on April 23 that Continental is considering the sale of stock as well as divestments to raise cash for upcoming debt payments.

Schaeffler, which makes transmission parts and ball bearings for cars, planes, and windmills, wants more time to reach an agreement with banks, as it continues to pursue a merger with Continental, CEO Geissinger said in an July 16 interview with Bloomberg.

Hostile Approach

Schaeffler paid 75 euros a share for 90.2 percent of Continental’s stock after a hostile approach made just as financial markets collapsed last year. A takeover agreement that runs at least until spring 2014 limits Schaeffler’s direct ownership of Continental to 49.9 percent, with banks holding another 40.3 percent on its behalf.

Commerzbank AG, Royal Bank of Scotland Group Plc, UBS AG, Landesbank Baden-Wuerttemberg and UniCredit SpA’s HVB Group unit financed Schaeffler’s purchase of Continental, which was completed in January.

Moody’s Investors Service cut its rating on Continental’s debt, already two steps below investment grade, by one level to Ba3 on June 2, citing the “severe downturn in global automotive markets” and “uncertainty” over the manufacturer’s relationship with Schaeffler. Moody’s may lower the rating further, the credit-reporting company said at the time.

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