Porsche-VW: The verdict on who got the best deal in the merger of Volkswagen and Porsche is still some way off. But Porsche seems to have scored an early points victory. And the details of the tie-up between the German family-controlled carmakers confirm what a tortuous deal this is.
In step one, VW is buying 42% of Porsche’s core auto unit for E3.3bn. It is also acquiring a dealership network, owned separately by Porsche’s founding family, for around E3bn. Meanwhile, the emirate of Qatar is to relieve Porsche of options it holds over almost 20% of VW – a move that reduces a balance-sheet liability at the sports-car maker.
This is not as expected. When the idea of a merger was agreed in late July, the intention was that step one would see Porsche sell its entire auto business to VW. The controlling Porsche family was expected to inject the dealership business into Porsche as “in-kind” capital.
Moreover, the terms put a higher value on the businesses being sold to VW than anticipated – hence the sharp rally in Porsche shares on August 14. The big surprise was VW’s assessment that Porsche’s car business has an enterprise value of E12.4bn, thanks to unspecified synergies.
But the revised structure makes sense. An in-kind capital increase (issuing new shares in exchange for assets rather than cash) would have been legally problematic. Better for VW to buy the dealership than Porsche to absorb it. But VW could not afford to buy all of the Porsche car business in addition without trashing its credit rating. So better to buy a minority stake. VW has secured the right to buy the rest at the same valuation later.
Porsche has now substantially cut its E10bn of debt. VW has obtained certainty over owning Porsche’s core asset, plus much-needed clarity over a potentially wayward shareholding that will now end up in Qatar’s hands.
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Why not go ahead with a full VW-Porsche merger now? Because the companies also want to strengthen their balance sheets by issuing new non-voting shares, a process that takes time because of the legal thicket that surrounds both businesses. VW’s share sale will be in the first half of next year, a promise required to keep its credit rating. Porsche’s will be in 2011. The deal could probably go through without the latter, albeit leaving a more highly geared company.
Tax or legal obstacles still lie in the way of a full merger. But if it goes ahead, the families that control the two companies will end up with just under 40% of the new automotive giant, with Germany’s state of Lower Saxony holding 20% and Qatar ranking a close third, according to a Breakingviews.com analysis.
That will leave a tiny free float of voting shares. But the capital increases will see a flood of new non-voting shares – potentially enough to qualify for Dax inclusion – providing investors with economic exposure to the company. A pleasantly simple outcome to a tortuous transaction.