Panic to close VW shorts as Porsche move surprises

A Volkswagen logo sign is seen next to the grill of a 2009 GTI automobile inside the lobby of the U.S. headquarters building of Volkswagen Group of America in Herndon, Virginia, September 18, 2008.

FRANKFURT (Reuters) - Volkswagen's (VOWG.DE) share price tripled on Monday as short sellers piled into the stock to sew up their speculative positions on news Porsche had bought up nearly all VW's remaining free float.

The stampede pushed the value of VW's voting stock alone at one point to a record 188 billion euros ($233.9 billion), surpassing Toyota's (7203.T) market cap of $113 billion.

Porsche (PSHG_p.DE) said on Sunday it held stock and options equivalent to 74 percent of Europe's biggest carmaker and aimed to push through a domination agreement next year that would give it management control and capture VW's mighty cash flows.

This will almost certainly meet objections from VW's home state of Lower Saxony, which controls just over 20 percent. [ID:nLQ46943]. In return for losing their dividend, minority investors would get an annual cash payout set by Porsche.

Porsche controls 31.5 percent of VW stock via cash-settled options and its counterparties are likely holding shares as insurance against price spikes. This means investors who sold borrowed VW shares in hope of buying them back at lower prices are scrambling to find the few remaining shares on the market.

Sanford Bernstein analyst Max Warburton questioned Porsche's motives in announcing its holding, and suggested the company may have wanted to cash in one last big jackpot at the expense of unsuspecting investors.

"To have shorted the stock, hedge funds must have inadvertently borrowed stock from Porsche," he told clients, citing the less than 6 percent of the shares in free float.

Warburton believes VW's daily trading volume consisted of speculators unknowingly selling these shares back to Porsche or its counterparties, running headlong into a trap.

Estimating the amount of short positions left to be closed at more than 15 percent of VW's total voting stock, Porsche and its banks could now "name their price."

Volkswagen surged as high 635 euros in the closing half hour of the session, lifting the DJ Stoxx European autos index .SXAP some 70 percent despite heavy losses in every other constituent stock.

The shares finished up 146 percent, closing at a record 520 euros. By comparison, VW's preferreds (VOWG_p.DE) sank 14.4 percent to 37.64 euros -- most likely due to the unwinding of trades shorting ordinaries to go long preferreds.

Porsche fell 9 percent, pricing the future owner of Volkswagen at around 7 billion euros.

WIDENING SPREADS

M.M. Warburg's Marc-Rene Tonn suggested the fully floated 105.2 million preferred shares might replace VW ordinaries in the German blue-chip DAX index .GDAXI.

"VW preferred shares appear to offer much better value to investors when compared to the ordinaries from a fundamental valuation point of view, particularly when considering a net cash position of 30 euros per share at VW," he wrote on Monday.

Christian Aust of UniCredit agreed: "This might open the room for the VW preferred shares to enter the DAX as currently both the market cap (4.45 billion euros) and the turnover criteria (Rank 30) are fulfilled."

Analysts have in the past recommended buying VW preferreds over ordinaries in expectations that the growing spread between the two, once just several euros, would close.

This month VW ordinaries surged to 452 euros as traders cited speculation the collapse of Lehman Brothers may have forced hedge funds that had gone short using shares borrowed from the U.S. investment bank to close their positions quickly.

The head of German regional lender WestLB WDLG.UL, Thomas Fischer, had to fall on his sword in July 2007 after the bank was burned by proprietary trades that speculated on VW ordinary-preferred spreads earlier that year.

If the free float in Volkswagen's ordinary shares were to fall below 5 percent, the Frankfurt Stock Exchange's index revision committee would automatically replace them in the DAX index with the top-ranked stock measured by free-float market capitalization and trading volume, Deutsche Boerse said.

"At the moment, Volkswagen's preferred shares (VOWG_p.DE) are the best placed non-index shares, but it would not be an automatic decision to replace VW's ordinary shares with the company's preferred shares in the DAX. It's the ranking at the time of the decision that counts," a Boerse spokeswoman said.

For a chronology, of Porsche's takeover of VW please double click on [ID:nLQ622493]

(Additional reporting by Peter Starck and Steve Slater)