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VW, Porsche To Become “Integrated” Car Maker

In The Real World, Porsche Will Be Another VW Brand.
Crushing Debt Burden Forces Porsche To End Quixotic Pursuit Of VW.
Final Structure For Merger Expected Within A Month.

You could call it a bridging loan too far. Little Porsche’s ambitious, some would say outrageous, 3-1/2 year attempt to take over the massive Volkswagen has fallen at the last fence.

News that Porsche had halted its attempt to take over VW, and the Piech and Porsche families had agreed to create an integrated car manufacturer, signals the end of Porsche’s gallant, against-the-odds attempt. Porsche came pretty close and after establishing a base camp for a merger with VW with its 51 per cent stake, it had big problems stretching the finance to achieve 75 per cent for a “domination” agreement. For a small company with revenues 16 times smaller than VW, that was an impressive effort. But Porsche was left with €9 billion of debt after accumulating the VW shares.

Most observers reckoned that the family deal will lead to a merger of Porsche and VW, and also that the position of Porsche CEO Wendelin Wiedeking looks shaky.

“After masterminding the acquisition of a majority 50.76 per cent shareholding in VW during January, they (Wiedeking and allies, were) in a position where they struggled to refinance Porsche’s existing debt and where they were still looking to finalise an extra €2.5 billion tranche of the refinancing package,” said IHS Global Insight analyst Tim Urquhart.

VW the dominant mother brand
“VW is now effectively first among equals once more as the dominant mother brand in a large vehicle group comprising 10 brands and covering all segments and sectors of the market. However, this deal now raises questions over the strategy of Wiedeking, which had previously looked like a masterstroke. Did Porsche really need to spend around €20 billion in order to effectively become a brand in the VW Group? This is something that the markets and the other shareholders of Porsche will no doubt have an opinion on,” said Urquhart.

UniCredit of Italy felt there many unanswered questions about the deal, with potential problems from union representatives, and the attitude of Lower Saxony which has a 20 per cent blocking stake in the current VW share structure.

More riddles
“After the news, there are more new riddles than answers, especially if Lower Saxony is included in the discussions in the coming four weeks,” UniCredit said in research note.

VW said a joint committee will work over the next month towards coming up with a finalised structure for the new company, as well as consulting with Lower Saxony and the workforces of both companies.

Experts believe negotiations on a merger could stretch well into next year and involve a capital increase of up to €4.5 billion at Porsche to relieve its debt burden. There is also a question mark over the 20 per cent of VW options that Porsche holds.

“If there is a merger scenario and a new holding company, we see the risk that Lower Saxony’s stake might be diluted, putting its VW Law in danger,” UniCredit said.

U.S. rating agency Standard & Poors didn’t like what was going on at VW and cut its credit rating, although it assumed there will be a merger.

“The VW (action) reflects our overall concern about the potential impact on VW of Porsche’s credit quality and its prominent role as VW’s largest shareholder,” said Milan-based S&P credit analyst Barbara Castellano.

Complex balance of power
“Due to the complex balance of power among VW stakeholders, the structure of the merger will, in our view, probably have to reconcile a number of diverging interests. We believe that, over the past two years, Porsche has departed from its formerly relatively conservative financial policy by debt financing its stake increase in VW. We see that Porsche is now under pressure, due to the large amount of financial debt it accumulated to buy these shares. Any merger solution could, in our opinion, incorporate actions to alleviate this pressure,” Castellano said.

The Financial Times’ Lex column said Porsche’s failure meant VW chairman Ferdinand Piech was posed to emerge as the ultimate victor.

“By agreeing to a merger, Porsche and its family shareholders have implicitly admitted that, with debt topping €9 billion, they over-reached themselves by trying to acquire a much larger company. In spite of pointed references to the Porsche brand retaining independence, their sports cars will become one of the 10 marques under, in essence, a VW umbrella,” Lex said.

Global Insight’s Urquhart said the plan for Porsche/VW should allow all the separate parts of the business to operate independently, while still working on significant synergies.

“If this structure can be made to work with minimal management infighting, it should leave the VW Group in a position to prosper in the post-credit-crunch automotive market,” Urquhart said.

Neil Winton – May 12, 2009

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