Schaeffler Group, the car-parts maker strapped with €11 billion ($14.4 billion) in debt from buying Continental AG, failed to secure German government aid and was told to come up with a business plan first.

Representatives of Schaeffler and Continental, Europe's second-largest automotive-component maker, met late yesterday with federal and state officials, the economy ministry said today. A "viable and forward-looking" plan, agreed on with creditors, is "a prerequisite for further negotiations," the Berlin-based ministry said.

The company, owned by billionaire Maria-Elisabeth Schaeffler and her son Georg, is seeking government assistance to ease debt after buying 90.2 per cent of Hanover, Germany-based Continental. Talks with German states, including Bavaria, Lower Saxony and Baden-Wuerttemberg, have been unsuccessful.

Bavaria's government ruled out a direct investment in Schaeffler after negotiations on 27 January, saying that only loan guarantees would be considered.

Maria Schaeffler defended the request for state aid following her company's $13.1 billion leveraged gamble to take over Continental, three times its size. "We are experiencing the biggest financial crisis in decades, we have a global recession and a crisis in the automotive industry," she explained. (See: Continental agrees to conditional sale to Schaeffler)

Asked whether she was using the meltdown in capital markets as an excuse for management mistakes in the debt-financed takeover of Continental, she said Schaeffler acted in its best judgement, adding, "The financial crisis is no pretence."

Schaeffler argued that experts believed at the time her company had actually acquired Continental at a 25-per cent discount to the €100 per share it was worth, and no one could have anticipated the impending collapse in the stock.

The company plans to present a proposal to the government in the coming weeks after consulting with its banks, spokesman Detlef Sieverdingbeck said. He called the talks "constructive." Antje Lewe, a spokeswoman for Continental, declined to comment.

Schaeffler, which makes transmission parts and ball bearings for cars, planes and fishing reels, aims to combine the automotive-parts businesses of the two companies to cut costs. Together, Schaeffler and Continental have €22 billion in debt, as a global recession plunges the auto industry into its worst crisis in more than a decade.

Schaeffler is asking the government to buy a stake in the company worth as much as €4 billion. KfW Group, Germany's state-owned development bank, is unlikely to take a stake in the manufacturer, KfW Chief Executive Officer Ulrich Schroeder said today at a news conference in Frankfurt.

Continental shares are trading 81 per cent below the €75 a share that Schaeffler paid under its bid, which was made before financial and auto markets collapsed. Schaeffler directly holds 49.9 per cent of Continental's capital after transferring 40.3 per cent to private German banks for possible sale later.

The arrangement is the result of an August agreement between the two companies that governs their relationship. It restricts Schaeffler from boosting its direct holding to a majority or adding to Continental's debt, and calls on Schaeffler to support management's strategy. Continental is also required to keep its headquarters in Hanover.