IHS Global Insight Perspective | |
Significance | Qatar Holding will acquire a 10% voting stake in Porsche and 17% in eventual parent group VW Group as a result of its 7-billion-euro investment in the German giant. |
Implications | VW and Porsche are still to enact their own capital increases, VW's will happen in the first half of 2010, whilst Porsche's plans are less concrete, but necessary to pay down the debt pile with which it is struggling. |
Outlook | Questions over corporate governance have already been raised as the power to appoint VW's supervisory board may easily be skewed. With its recent track record and reputation tarnished from the scandals of a few years ago, VW will need to display clarity and transparency in its future make-up to ensure confidence in its integrity with external investors. |
Porsche has agreed to sell a 10% voting stake in its business to Qatar Holding, which will also take a 17% voting stake in the Volkswagen (VW) Group as it acquires share options held by Porsche in a deal worth 7 billion euro (US$9.9 billion). The complex deal with Qatar was one of the last remaining key parts of the merger, tentatively agreed last week (see Germany: 13 August 2009: VW, Porsche Tentatively Agree Merger Details; May Resurrect Auto Union Name). VW will purchase 42% of Porsche for around 3.3 billion euro by 2011, initiating a capital increase of 4 billion euro in preference shares in the first half of next year to fund the purchase. In addition, the controlling Piëch and Porsche families will sell Porsche Holding Salzburg, Europe's largest dealership, to VW.
VW's shares fell 15% on the news as the market determined it had agreed to pay too much for its stake in Porsche, while the latter's share price rose 9% on the news. Furthermore, the appointment of VW Group CEO Martin Winterkorn and VW's CFO Hans Dieter Poetsch to lead Porsche Automobil Holding SE, the holding group which controls both companies, raised questions about potential conflicts of interest and corporate governance. "You can't negotiate with yourself," said Wolfgang Gerke, an honorary professor at the European Business School and member of the Frankfurt Stock Exchange's exchange council, in a Reuters interview. "The VW-Porsche case raises several corporate governance issues, including conflicts of interest," Gerke said, adding that insufficient information was available to determine whether either company had suffered a disadvantage. Marco Cabras, a spokesperson for Germany's DSW association for private investors, said: "This isn't a prime example of good corporate governance. More transparency is desperately needed about decision making procedures and processes." Meanwhile, both parties discounted the claims, with Winterkorn saying he saw no potential conflicts of interest, adding that if any arose they "could be resolved." Poetsch said that he and his boss would abstain from any decisions by the Porsche management board on agreements between the two companies. However, Cabras pointed out that as Porsche already has more than 50% of VW's voting shares, Winterkorn could use Porsche's stake to influence the annual vote to endorse VW's management board. "This issue needs to be resolved," Cabras said.
Meanwhile, Poetsch also claimed that the merger could be completed ahead of schedule, in a "very optimistic scenario" if the economic and financial markets conditions were favourable, saying that Porsche will deliver impressive results for its operating business for 2009. Poetsch also said that the combined group might beat its target of becoming the global market leader before 2018, an ambitious target set by Winterkorn. Poetsch added that the merged entity will seek cost savings and production synergies through joint purchase and logistics, closer co-operation in financial services, joint development projects and the use of similar modules in both groups. VW had earlier claimed an ambitious 3 billion euro in savings and added 700 million euro in annual operating profit from the merger. Poetsch said in a Die Welt interview that although the cost synergies will be achieved "swiftly," revenue synergies will take some three years to achieve.
Outlook and Implications
With the Qatar investment in place, the remaining financial pieces, namely the VW Group's capital increase to fund the purchase and Porsche's holding company's own capital increase to pay down the remaining debt, will follow in due course. VW said it will issue 4 billion euro in preferential shares in the first half of 2010 to fund the purchase, despite having enough cash on hand to buy the stake without tapping the markets. The decision to go to the markets will mean VW retain its around 11 billion euro cash pile to fund other expansion plans as it seeks to overtake GM and Toyota to become the world market leader by 2018.
Poetsch's claim of positive operating performance for Porsche in 2009 is surprising given the intense pressure on revenues from the global fall in sales the brand has suffered; an improvement in operating performance in this period would be most impressive. Although its operating performance may prove to be a bright spot for Porsche, it will not affect the heavy net loss expected on write downs associated with share options over the attempted takeover. Furthermore, the synergies and savings appear somewhat overstated, given the language used in the merger. VW and Porsche already extensively co-operate on the Cayenne and the new Panamera models, but further collaboration will be tricky with Porsche's unique platforms and engine technology. Potential to share smaller, less conspicuous modules is a given, but unlike Lamborghini, which shares powertrain and platform technology with Audi, the opportunity to do the same with Porsche will remain limited if the brands are to retain their integrity. Thus, the 3 billion euro in synergies and savings will have to some from other areas and deriving that magnitude of cost savings is far from straightforward or obvious. Porsche is expected to raise around 5 billion euro in the form of a share issue, both ordinary and preferred, although no timescale was given.
The issues over corporate governance are a concern. It is just a few years ago that VW's supervisory board was mired in controversy and scandal over bribery and corruption, resulting in sackings, convictions and imprisonment. Transparency will be paramount to the new board and the obvious conflicts of Winterkorn and Poetsch should be decided on before the full merger. Qatar and the State of Lower Saxony will be key to ensuring that the supervisory board of VW maintains absolute clarity.