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.”
The billions that could have been lost raise the questions over whether disclosure rules should also apply not just to plain vanilla stock options but cash-settled ones as well.
“The VW situation highlights the need for a consistent approach to contracts for difference disclosure across Europe,” said Andrew Shrimpton, a member of Kinetic Partners and the former head of hedge fund supervision at Britain’s Financial Services Authority.
“If the UK FSA brings in requirements to stop secret stakes being acquired under the radar then the same approach should be applied in the rest of the continent.”
German hedge fund association BAI admitted some funds might have been damaged by the squeeze, but that was inevitable in a market economy and an inevitable consolidation among the world’s 10,000 was healthy.
Aleksander Kluzniak, its chief lobbyist, said he saw no need for a regulatory clampdown on derivatives, such as a registry of hedging positions, just because the market was surprised by creeping takeovers like Porsche-VW and Schaeffler-Continental (CONG.DE), which were facilitated by building up clandestine positions in cash settled options.
“I doubt it would lead to the required results. New types of derivatives or trading techniques would emerge that were not subject to this regulation,” Kluzniak explained.
Only 24 hours after peaking as the world’s biggest company by market value, VW stock fell on Wednesday as low as 491 euros as the market exhaled in relief that Porsche was releasing a part of its hedge and alleviating the worst of the squeeze.
Wednesday's retreat kept Germany's blue-chip DAX index .GDAXI in check despite double-digit rises on other stocks after Wall Street clocked up its second best day's gain on Tuesday.
Closing down 45 percent at 517 euros, VW’s fall shaved off nearly 600 points from the index on Wednesday, meaning the DAX would otherwise have closed up 12 percent.
Deutsche Boerse (DB1Gn.DE), operator of the Frankfurt exchange, said late on Tuesday it would cut the weighting of Volkswagen shares in the DAX to 10 percent from Monday after VW’s leap had distorted the index.
Index provider Stoxx Ltd also said it would cut the weighting of Volkswagen shares in its main indexes and cut Volkswagen’s free float factor to 0.3732 from 0.4963.
Volkswagen shares touched 1,000 euros at one point, pushing its weighting in the 30 member-DAX index to 27 percent.
Additional reporting by Bill McIntosh, Knut Engelmann, Christoph Steitz, Sarah Marsh and John O'Donnell, editing by Will Waterman and David Cowell