IHS Global Insight Perspective | |
Significance | Porsche and VW have agreed over the issue of valuation, paving the way for an investment from Qatar state investment fund to ease Porsche's debt situation |
Implications | Details of the Qatar investment currently remain unclear, but the move will not affect the blocking minority held by VW's home state of Lower Saxony. |
Outlook | VW has been keen to stress Porsche's continued independence, but conflicts remain in brand overlap and engineering integrity, although the combinations offer some exciting possibilities for future products. |
The Volkswagen (VW) Group and Porsche have tentatively agreed the framework which will see VW take control of its majority shareholder now that "questions over valuation have been resolved", according to reports citing officials close to the matter. Members of the supervisory boards are expected to vote today in a memorandum of understanding (MoU), which will set the framework for a deal that will eventually lead VW absorbing Porsche into its automotive operations by the end of 2011 by buying a 49% stake in the automaker. The merger could lead to the resurrection of the Auto Union name, which may be the name adopted for the combined group as VW's brand portfolio grows to 10. The new group is likely to be headed by current VW Group CEO Martin Winterkorn. VW stressed that Porsche would remain an independent brand, as is the case with Audi.
As part of the deal a Qatar state investment fund is expected to buy Porsche's package of share derivatives in VW which equate to 20% of the latter, which will alleviate Porsche's pressing debt situation. Qatar may also take a stake in Porsche's holding company, which could be converted into a stake in VW. Details of the Qatar investment and what it will eventually mean vary significantly in the various reports and it remains unclear whether Qatar would take voting shares in Porsche, in VW, or in both. Meanwhile, Porsche's shareholders have already approved plans for a capital increase of at least 5 billion euro, involving ordinary and preferred shares. The company is facing a pre-tax loss of up to 5 billion euro due to write-downs on the value of VW stock hedges. VW's home state of Lower Saxony is expected to retain its blocking minority stake.
Outlook and Implications
With the stumbling block of valuation overcome and the Qatari investment all but secured, the path to a takeover of Porsche by VW seems to be clear now. The reversal of the takeover brings to an end nearly four years of family disagreements and legal wrangles in what will surely be regarded as one of the most ambitious takeover attempts in industrial history. The takeover eventually cost Porsche's CEO Wendelin Wiedeking and CFO Holger Härter their jobs, and has left Porsche crippled by debt. VW have yet to outline the funding of the takeover, but it is known that it can pay cash for the stake, estimated to be worth between 4 and 5 billion euro for the 49% stake, from its cash reserves, but may prefer a capital increase of some description. VW currently maintains around 11 billion euro in cash reserves. The extended timeline for the purchase and VW's sound balance sheet and robust fiscal and sales performance, even in these most challenging of times, mean that the move will not pressure the company unduly.
Porsche for its part is expected to report a heavy loss due to write-downs associated with its VW Group shares. Meanwhile, the 5-billion-euro capital increase has been agreed to come in the form of a share issue, both ordinary and preferred. in the long term, there remain interesting questions over how Porsche will be merged with the VW Group, what industrial and technological collaborations it will carry out and how it will co-exist alongside companies that are actually major rivals, such as Audi and Lamborghini. But the potency of the Porsche brand combined with the synergies and R&D resources of the VW Group should, in the longer term, present a potent force within the industry.