Schaeffler announced a 12 billion euro ($17 billion) refinancing deal on Tuesday that eases the German ball-bearing maker's debt problems and moves it a step closer to merging with Continental AG.
Schaeffler took control of the much larger German auto supplier last year after launching a hostile $18 billion bid in which it ended up collecting more shares than it could afford, lumbering itself with billions of euros of debt.
The resulting standoff triggered a power struggle with Continental, which is battling its own debt woes from acquisitions it made before car markets collapsed.
Schaeffler's debt agreement now gives it more breathing room to sort out its finances and tighten its grip on Continental.
Through this (financing plan) the takeover by Schaeffler is a done deal, said analyst Heino Ruland at Ruland Research.
Continental shares jumped on the news and were up 14.8 percent at 25.55 euros by 1224 GMT (8:24 a.m. EDT), heading the German midcap index .MDAXI which was up 0.7 percent.
Schaeffler, which paid 75 euros each for its Continental shares, holds just under half of the company's stock directly. Another 40 percent of shares it was tendered are parked with banks.
Merging Schaeffler and Continental would create an automotive supplier with 33 billion euros in annual sales and around 200,000 employees.
Lenders that financed Schaeffler's risky leveraged takeover have continued to provide it with loans to buy time for a solution as the company was hit by the double whammy of high debt service payments and crumbling demand for auto parts.
Now its banks -- Commerzbank, Royal Bank of Scotland, UBS, Unicredit's HVB and German state-owned LBBW -- have agreed to split existing loans into two tranches maturing in 4.5 and 6 years, Schaeffler said.
The last 12 months have been war. Now the war is over, one banker close to the transaction said.
Two people familiar with the matter told Reuters that around 7 billion euros will be used to finance the company's operating business. The other 5 billion would cover the holding company's financial liabilities and is not secured by assets.
GAINING THE UPPER HAND
Another person familiar with the matter said terms of the new loan agreement were more costly for Schaeffler than those agreed before the crisis set in, but Schaeffler would be able to meet the conditions unless demand for auto parts deteriorated further.
Grappling with debt, Schaeffler struggled for months to gain the upper hand against Continental. This month it ousted Continental Chief Executive Karl-Thomas Neumann, replacing him with one of its own managers.
But Neumann still managed before his departure to push through preparations for a capital increase of up to 1.5 billion euros. If completed, the step would dilute Schaeffler's stake if the ball bearings maker was unable to afford to buy new shares.
Schaeffler said it plans to give itself a capital market- oriented structure. One person familiar with the matter said Schaeffler could turn itself into a joint stock company by mid-2010, then turn its attention to taking over Continental.
Schaeffler's financing is home and dry. Continental still has some homework to do, one banker close to the matter said.
Standard & Poor's cut Continental's long-term debt rating to B+ last week and Moody's cut it to B1, both with negative outlooks. Analysts cite worries about Schaeffler's growing influence and 3.5 billion euros of debt due in August 2010.
The Schaeffler/Continental struggle echoes another between two German auto sector companies that has culminated in Porsche agreeing to merge with Volkswagen and sell assets worth billions of euros to prop up its strained finances.
(Reporting by Arno Schuetze, Patricia Uhlig, Philipp Halstrick, Alexander Huebner and Tyler Sitte; Writing by Maria Sheahan; editing by John Stonestreet)
($1 = 0.7074 euro)