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More Investors Reckon Full VW-Porsche Merger Won’t Happen

“Merger deal for Porsche, VW nearer”, said the Wall Street Journal headline, but many investors now think this isn’t going to happen.

A month ago Deutsche Bank said the chances of a merger are receding.  In late November, Bank of America Merrill Lynch, in a research note on Porsche, joined the nay-sayers.

“Central case – we do not expect a merger with VW,” said the report.

“Our central case is that Porsche SE will not merge with VW; instead, we expect the put/call option structure re Porsche AG to be exercised between 2012 and 2014. We believe evaluating the impact on the Porsche/Piech family is key. Under a merger scenario the family’s share of VW ordinary voting rights would fall from 53 per cent to 27 per cent and we believe that this would lead it to oppose a merger,” said Merrill Lynch analyst Fraser Hill.

The Wall Street Journal story was prompted by news Porsche agreed tax and interest payments of about €626 million on stock-option transactions. Porsche had budgeted €1.35 billion as a possible liability. But apart from the family issues, there are other big hurdles for the deal to surmount. Uncertainties over German tax law mean that any merger couldn’t take place until 2014 without incurring a massive, potential €2 billion penalty. After that date the potential liability drops to zero. The announced tax agreement is unrelated to this. Meanwhile law suits in the U.S. threaten massive charges against Porsche for allegedly manipulating the stock market as it sought to take over VW. Viking Global Investors allege this activity cost it $390 million. Another law suit from short-sellers alleges a loss of more than £1 billion.

$1 billion law suit
A decision on the more than $1 billion law suit is expected to be announced on January 17, 2011.

A €5 billion capital increase by Porsche is expected to go ahead in the first half of next year. VW owns 49.9 per cent of Porsche, after the luxury sports car maker failed in a hostile takeover attempt of Europe’s biggest mass car manufacturer. VW agreed to combine with Porsche in August 2009 when Porsche’s debt tripled to more than €10 billion after it failed to capture VW by buying stock through options trading.

Whatever happens to the planned merger may well be moot. Volkswagen CEO Martin Winterkorn has said Porsche will in any case be subsumed into VW.

Meanwhile, Porsche announced operating profit boomed in its fiscal first quarter to €395 million between August and October from €52 million in the same period of 2009, as sales of Cayennes and Panameras surged.


Neil Winton – December 1, 2010

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