UPDATE 3-Volkswagen mulls funding options for Porsche deal

* Cap hike would bolster finances following Porsche deal

* VW authorised to hike capital by 90 mln euros

* Issuing voting shares would dilute Lower Saxony stake

* VW voiced concerns over risk to credit ratings in May

* VW shares down 1.9 pct, Porsche shares down 11.4 pct (Adds media report on possible extraordinary general meeting date, updates share prices)

By Christiaan Hetzner

FRANKFURT, July 27 (Reuters) - Volkswagen (VOWG.DE), Europe's largest carmaker, is considering a capital increase as one option among many to finance its takeover of debt-laden sports car maker Porsche, bankers familiar with the situation said.

Issuing new voting shares is seen as a problem, however, since it would dilute the 20 percent voting stake owned by the German state of Lower Saxony, wiping out its blocking minority.

VW ordinary shares were down 1.9 percent in Frankfurt at the market close, while the German blue-chip DAX .GDAXI closed up 0.42 percent. Separately, preferred shares in Porsche SE sank almost 11.4 percent as more reports emerged that its finances had deteriorated further. [ID:nLP530383]

On Monday, the Financial Times reported that Volkswagen was considering raising up to 4 billion euros ($5.7 billion) ahead of a takeover of Porsche (PSHG_p.DE) to protect its credit ratings. The report did not provide further details.

"Volkswagen is planning to buy Porsche's sports car business as fast as possible and, to finance this, they are thinking about strengthening their capital base," the FT quoted a person familiar with the situation as saying.

A spokesman for Volkswagen declined to comment.

At present, VW is authorised by shareholders to raise its capital by a maximum nominal value of 90 million euros until May 2011 through the issuance of new ordinary shares, assuming management would gain the approval of its supervisory board.

This would allow for the issuance of 35 million new ordinary shares, which would raise its capital base by nearly 12 percent.

Yet bankers involved in the deal cast doubt on a capital increase involving the sale of ordinary shares, since it would almost certainly meet with opposition from Lower Saxony, VW's second largest shareholder, which has two seats on the board.

Even when Volkswagen had to finance a costly restructuring programme at its ailing German operations that led to thousands of job cuts in 2006, it chose to raise 1.3 billion euros in fresh cash via the sale of its Europcar business rather than tap equity markets.

As an alternative, the company could issue new preferred shares (VOWG_p.DE), which do not carry voting rights.

"If there's a capital increase, then only with preferreds -- never with ordinaries," a banker familiar with the situation told Reuters.

If Volkswagen wanted to issue fresh non-voting shares, it would have to receive approval at a new shareholder meeting since management in April failed to win shareholder approval for authorised capital worth a nominal value of up to 400 million euros by 2014.

German business daily Handelsblatt, citing company sources, reported late on Monday that VW shareholders would be asked to vote on issuing new preferred shares at an extraordinary general meeting likely to be held in October.

Another banker involved in the matter said the issue of a capital hike depends on whether VW would otherwise be "prepared to temporarily let its rating slip to BBB+ from A-."

VW preferred shares, which are more liquid than the closely held ordinary shares, were down just over 2 percent.

ORDINARIES

"A capital increase would make perfect sense for VW and would enable it to maintain its low-A ratings on S&P and Moody's despite the planned full takeover of Porsche AG over a period of two years," UniCredit debt analyst Sven Kreitmair wrote on Monday, upgrading VW bonds to "overweight" from "marketweight."

Volkswagen said last week it plans a gradual takeover of Porsche, and Lower Saxony Premier Christian Wulff said at the time that VW's supervisory board could approve a detailed plan on Aug. 13 with the aim of completing the deal in mid-2011. [ID:nSP513587]

Volkswagen's automotive operations had net cash of 10.7 billion euros at the end of March, so the group could afford to pay the reported sum of 8 billion for the Porsche acquisition.

VW said in early May that maintaining its existing credit ratings had top priority when considering any deal to create an integrated automotive group.

Germany's weekly magazine Der Spiegel reported recently that Porsche's debt totals around 14 billion euros. VW would have to pay Porsche roughly 7 billion for both the Porsche Holding auto dealership and a 49.9 percent stake in the Porsche AG sports car business, it said. [ID:nLP530383]

In order to bolster its negotiating position, Porsche said on Thursday it would seek at least 5 billion euros in fresh funds either through cash or a contribution in kind, or a mixture of both. [ID:nSP513587]

M.M. Warburg downgraded Porsche to "hold" with a price target of 52 euros. Analyst Marc-Rene Tonn argued that the pressure on its shares stemmed partly from renewed concerns it could be saddled with 14 billion euros in debt, adding that there was still no clarity over how much liquidity Porsche might receive from Volkswagen and Qatar. (Additional reporting by Philipp Halstrick, Edward Taylor and Marilyn Gerlach; Editing by Lincoln Feast, Rupert Winchester and John Wallace)