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Will VW Porsche Merger Ever Happen?

German Probe Cuts Likelihood Of Deal Being Completed Soon
Law Suits, Appeals, Dismissals, Tax Questions Create Murky Outlook

But Whatever Happens Legally, Porsche Physically Destined For VW 

The merger between Volkswagen and Porsche has been delayed again and some investors wonder if it will every happen.

Porsche said a probe by German authorities into allegations of share-price manipulation will take longer than expected, pushing completion of the deal into 2012. Porsche said the likelihood of the deal being completed within the time frame of the initial agreement has been reduced to 70 per cent from 50 per cent.

Last year, questions over German tax law were said to delay any merger until 2014 without incurring a massive, potential €2 billion penalty. Law suits in the U.S. also threatened charges against Porsche for allegedly manipulating the stock market as it sought to takeover VW. In January, a U.S. court dismissed a $2 billion law suit from 39 hedge funds who believed they had been misled while Porsche was buying shares in its failed bid to take over VW. The plaintiffs have appealed, and another, separate, $390 million claim has been filed in the U.S.

Deutsche Bank has consistently said that the chances of a merger are less than 100 per cent.

“We believe these statements underpin our view that the anticipation of a quick merger remains premature and we continue to believe that the alternative route – exercise of put/call options – is a more likely alternative, also in light of the lingering German civil lawsuits and the uncertain but needed approval of VW preference shareholders,“ Deutsche Bank analyst Gaetan Toulemonde said.

Timely merger chances slip
Citibank Global Markets believes the chance of a timely merger decision has slipped to just 30 per cent.

UBS Investment Research said delay could undermine the planned €5 billion capital increase Porsche plans in the first half of 2011, despite the fact that 50 per cent of it has already been underwritten by the controlling shareholders.

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.

Other investors still believe a deal will eventually take place, but whatever the result of the financial and legal shenanigans, Porsche’s physical fate is more certain, because whatever happens to the planned merger, Volkswagen CEO Martin Winterkorn has said Porsche’s business will in any case be integrated into VW.

Neil Winton – March 1, 2011

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