VW shares halve as Porsche eases short squeeze

By Christiaan Hetzner

FRANKFURT (Reuters) - Shares in carmaker Volkswagen (VOWG.DE) nearly halved on Wednesday after controlling shareholder Porsche (PSHG_p.DE) took steps to ease a squeeze on shortsellers who more than quadrupled the price of the stock in days.

Porsche itself prompted the meteoric rise in VW stock with its announcement on Sunday that it had effective control of 74.1 percent of VW, leaving less than 6 percent tradeable in the market.

Hedge fund manager David Einhorn's Greenlight Capital suffered heavy losses from a VW trade as a result, people familiar with his portfolio said on Tuesday.

"In order to avoid further market distortions and the resulting consequences for those involved, Porsche SE intends... to settle hedging transactions in the amount of up to 5 percent of the Volkswagen ordinary shares," Porsche said in a statement.

The stampede to cover open short positions after Sunday's announcement vaulted VW's market value to 278 billion euros ($348 billion) and its shares to a record close of 945 euros on Tuesday.

Investors cried foul, and German securities watchdog BaFin said it would take a closer look at Porsche's dealings for signs of insider trading and market manipulation, but the company said again on Wednesday it had done nothing wrong.

Analysts at Commerzbank and Merck Finck estimated Porsche's strike price on its cash-settled hedges were around 100 euros per share, meaning Porsche could make 5.9 billion euros from selling 5 percent of its call options at a price of 500 euros.

Although it stands to gain more than the value of all of its listed preferred shares put together, a Porsche spokesman denied speculation it wanted to "cash in" with the deal.

Nevertheless analysts believe Porsche can raise its direct stake in VW of 42.6 percent to 75 percent in part through the windfall profits the short squeeze offers.

Once there, Porsche plans to submit VW to a domination agreement, granting it full control over such prize assets as Audi (NSUG.DE).

Volkswagen's premium brand underlined its importance to the group, bucking the sector trend for declining earnings and boosting operating profit by almost 14 percent to 2 billion euros in the first nine months.

Shortsellers who rushed to close their positions after Porsche's announcement on Sunday were paying virtually any price to get their hands on the few remaining shares, even though Porsche insisted its announcement would allow short sellers to unwind their positions "without haste and without greater risk."

So far no hedge fund or banks have publicly acknowledged being on the losing side of the short squeeze.

"Clearly there has been a colossal amount of money lost," said a London hedge fund manger who invests in Germany but did not wager on the Volkswagen-Porsche play.

"There is obviously severe pain out there."