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UPDATE 2-Continental says no talks to sell truck tyre ops

(Adds Pirelli investment in Egypt in paragraph 14)

FRANKFURT, June 3 (Reuters) - German tyre maker Continental CONG.DE on Tuesday said it was not in talks to sell its truck tyre business, following a media report that Italian rival Pirelli PECI.MI was interested in the small, low-margin unit.

“There are no sales talks whatsoever,” a spokeswoman for Continental said.

The German company has said it would sell its smallest division if it proved impossible to lift profitability to double-digit returns. For the first quarter, the operating margin at the division was 3.8 percent.

Shares in Continental fell 3.3 percent by 1152 GMT, lagging moderate losses in the European automotive sector index .SXAP and a 1.8 percent gain in Pirelli shares.

Continental Chief Financial Officer Alan Hippe in April said weak sales were the problem at the truck tyre business, but a major restructuring was not needed since the company had already cut costs and a sale was possible.

Christian Mueller, analyst at Global Insight, said the company should go through with a disposal.

“It would be sensible right after the VDO acquisition to focus fully on the passenger car tyre business,” he said.

Chief Executive Manfred Wennemer first spoke of examining strategic options for the business in February 2007, but management has hoped new truck tyre models would spur demand and close the price gap with larger rival Michelin MICP.PA.

CHANGE OF STRATEGY?

Pirelli, the Italian tyre and real estate company, has voiced interest in buying Continental’s truck tyre business as it considers expanding through acquisitions, the Handelsblatt newspaper reported on Tuesday.

“We are looking at all attractive targets. Truck tyres are definitely interesting for us,” it quoted Pirelli Chairman Marco Tronchetti Provera as saying.

A spokeswoman for Pirelli downplayed the report, quoting Tronchetti’s response to it as: “In tyres, we have always looked at all the opportunities that can present themselves, but at the moment we are focused on organic growth, and in terms of the truck business we are looking mainly at emerging markets like Egypt, Russia and later on India.”

In a statement, Pirelli said it will invest $65 million to boost the capacity of its plant in Alexandria, Egypt, which makes truck tyres, by 50 percent to 1 million units a year.

Were Pirelli to seriously cast an eye on Continental’s truck tyre business, it would mark a break with previous strategy since Tronchetti had denied as recently as May any real interest in taking an active roll to consolidate the industry.

“We think there is room to grow on with our resources. We don’t see for the time being any interesting acquisition around,” he told a conference call when asked by an analyst whether he wanted to boost scale in its tyre business.

Tronchetti was also quoted by Handelsblatt as saying the group wanted to strengthen its property business in Germany and saw good opportunities in the medium term.

“Real estate prices are lower in Germany than in other European countries,” the paper quoted Tronchetti as saying. (Reporting by James Regan, Christiaan Hetzner and Arno Schuetze; Editing by Erica Billingham and Elaine Hardcastle)

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