-- Alexander Smith is a Reuters columnist. The opinions expressed are his own --
By Alexander Smith
LONDON Porsche (PSHG_p.DE) may own a lot of options over Volkswagen (VOWG.DE) shares. But the German sports car maker is increasingly bereft of alternatives when it comes to financing its own stretched balance sheet.
In theory, Porsche could use its 51 percent stake in VW to ease the pressure. But its value is heavily tied to the value of the stake. A partial solution might do more harm than good.
Porsche has been wrestling with its extended financial position since the turn of the year. It owes 10.75 billion euros ($15 billion) to banks -- built up assembling the VW stake. Its creditors can demand repayment next year. More pressingly it owes 700 million euros to VW itself, which is due for repayment in September.
Porsche doesn't have the cash at hand to repay this money. And it is hard to see its creditors rolling over their loans forever. After all, the market for luxury sports cars is in freefall. Porsche's U.S. sales fell 67 percent in June.
Porsche has two big assets -- the car company and its VW stake. The car company is worth 6 to 8 billion euros and the stake 37 billion euros at the current valuation. A glance at this latter figure might make you think Porsche's problem has an easy solution - it should just sell some VW shares.
But there is a snag. Porsche currently controls roughly 70 percent of VW -- the 51 percent direct stake and a further 20 percent under option. Together with the state of Lower Saxony, -- which controls another 20 percent -- it has roughly 90 percent of the issued ordinary shares. This has squeezed the market and supports the share price at nearly 230 euros -- roughly three times what most analysts believe it would trade at were the squeeze to be lifted.
Were Porsche to start dribbling out shares to meet its liabilities, the share price could fall sharply back to this "fair value". At 70 euros a share, the stake would be worth just 10.5 billion euros -- less than the debt Porsche took on to acquire it.
Porsche can't therefore "half-solve" the problem. It needs a solution that goes the whole hog. Since the beginning of the year it has had two options to achieve this.
One involves merging the business with VW in a way that would leave the underlying equity holders of Porsche with a substantial stake in VW. The problem with this is that VW seems reluctant to pitch straight into a deal. It claims it is uncomfortable about the extent of Porsche's liabilities. Rather than a full merger, there have been reports it would like to cherry pick Porsche's assets -- notably a 49 percent in its sports car business for 3 to 4 billion euros.
But this would not necessarily solve Porsche's financial problems. And if it continued to flounder, VW would then be in a position to drive an even harder bargain.
The alternative would be for Porsche to raise money first in order to strengthen its negotiating position. For months it has been suggesting that it can do this.
Porsche is still banking on the Qataris riding to its rescue by buying a large stake. The problem is that they may have to put up a significant amount of cash -- and that might end up diluting the Porsche and Piech families that control Porsche.
Achieving agreement on this looks pretty tough. Porsche Chairman Wolfgang Porsche is at daggers drawn with his cousin Ferdinand Piech, who is also VW chairman, in a struggle for control of the family firm.
Either side has the ability to block a capital increase. So whether or not the Qataris are keen, it requires the existing investors first to agree on the way forward.
In the absence of any deal Porsche stumbles on looking for some deus ex machina to rescue it from its folly. The German government agency KfW has turned down its request for an emergency loan. The longer this continues, the more likely it is that VW will force it to eat large quantities of humble pie.
-- At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. --
(Editing by David Evans)