Analysis: Porsche loses investment appeal as VW merger skids

BERLIN Fri Sep 9, 2011 12:07pm EDT

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BERLIN (Reuters) - German automaker Volkswagen looks set to abandon a merger with Porsche SE in favor of taking direct control of the sports car business, robbing investors in the troubled financial holding of their only reason to own the stock.

At stake is ownership of Porsche SE's crown jewel - majority control of the iconic Porsche sports car marquee which analysts estimate cranks out 1 billion euros in cash every year and industry-leading margins of about 20 percent.

Until Thursday, Volkswagen was set to seal a merger with the Porsche SE holding at potentially unfavorable terms this year in exchange for receiving the keys to the operating business and a bonus 700 million euros in additional annual synergies.

VW tore up that deal on Thursday citing unquantifiable legal risks, including a criminal probe into the holding's former management team.

Now minority investors in Porsche SE may be stuck owning non-voting shares in a holding that has no access to underlying cashflows apart from annual dividends, when they had been counting on swapping their discounted stock for shares in Volkswagen.

"The merger has not been delayed, it's been called off. Volkswagen will exercise its option to buy the remainder of the sports car business at a strike price of 3.9 billion euros before the end of 2014 and Porsche will remain a pure financial holding," one Frankfurt-based analyst argued, declining to be named for compliance issues.

"We see no reason why VW should continue to pursue a merger with Porsche SE," wrote UniCredit analyst Christian Aust.

SUZUKI SPAT

The setback to Porsche-VW comes only weeks after a very public spat with Suzuki Motor (7269.T), which threatened to end a partnership Volkswagen badly needs to tap into fast growing Asian markets like India and the southeast Pacific rim and drive its ambition to be the world's number one carmaker by the end of the decade.

Lawsuits by investors, unresolved windfall tax liabilities and a criminal investigation in Germany into breach of trust and market manipulation continue to haunt Porsche SE, which nearly went bankrupt in 2009 trying to take over Volkswagen using an opaque web of derivative instruments.

Adding to Porsche's problems on Friday was a report in news magazine WirtschaftsWoche that the Munich law firm CLLB filed a 1.1 billion damages lawsuit at a German regional court. The law firm could not be reached for comment.

Porsche shares sank 13 percent, reflecting among other things the lower valuations assigned to comparable holding vehicles like Exor (EXOR.MI), the Agnelli family holding company which is the biggest shareholder in carmaker Fiat.

CONTINGENCY PLAN

It seems likely VW will now revert to what had been its plan B - an outright 3.9 billion euro cash purchase of the remaining 51 percent of the sports car maker using call options that are rapidly gaining in value.

Analysts said VW's hints about a new, third way was likely just a tactic designed to buy time and prevent an even bigger sell-off in Porsche shares, hurting a key mutual investor of both carmakers, the Gulf state Qatar.

As part of a 2009 deal to recapitalize the highly indebted Porsche SE, Qatar agreed to buy a 10 percent voting stake from the Porsche and Piech clans which it expected to swap for more VW ordinary shares via the merger.

"Had VW said outright that the call option plan was the only remaining alternative, then the equity story behind Porsche SE would be completely dead and the share would fall not by a good 10 percent but by 25 percent," the Frankfurt analyst said.

"The logical consequence of the merger being called off would be for Qatar to sell its 10 percent Porsche SE voting stake back to the Porsche and Piech families, and Martin Winterkorn and Hans Dieter Poetsch resigning as CEO and CFO of Porsche to focus solely on their duties at Volkswagen," the analyst added.

The two executives at Europe's largest carmaker often warned how careful they had to be with their investors' money in view of the lopsided deal, particularly considering the VW chairman, Ferdinand Piech, is a major shareholder of Porsche.

Merging VW and its 19 billion-plus euros in net cash with a much smaller Porsche weighed down by 1.5 billion in net debt is a tough deal to sell to VW's preferred shareholders, who must approve the deal by an 80 percent majority. ($1 = 0.714 Euros)

(Additional reporting by Edward Taylor; Editing by David Cowell)

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