VW in Driver's Seat for Porsche Takeover

German operas are famed for their length and plot twists -- the Volkswagen-Porsche saga would fit well among them. An understanding between the two German auto makers appears to signal an end to each company's struggle for dominance as they seek to combine their operations, with VW coming out on top. But the fat lady isn't singing just yet.

VW will take a 42% stake in Porsche's auto unit, and will issue up to €4 billion ($5.7 billion) of preferred shares to pay for it. A full takeover of Porsche should be completed in 2011. It follows the failure of Porsche's audacious plan to take control of the volume auto maker, while racking up €10 billion of debt just as global car sales plummeted. Lower Saxony's blocking minority holding in VW prevented Porsche from ever consolidating VW's cash-rich balance sheet, leaving the luxury auto maker struggling to finance its debt.

Volkswagen CEO Martin Winterkorn, right, and head of Volkswagen's works council, Bernd Osterloh, address workers Friday in Wolfsburg, Germany, a day after the boards of Volkswagen and Porsche approved a merger plan.
The agreement provides relief for Porsche -- but isn't such good news for VW's preferred investors who must fund the transaction or risk dilution. VW expects to pay up to €3.3 billion for its stake, valuing Porsche's auto unit at €12.4 billion including debt. That's more than €3 billion higher than expected, according to Sal Oppenheim. What's more, the price tag includes an ambitious €700 million of cost synergies.

VW will also buy Porsche Holding Salzburg -- Europe's largest auto distribution business with an enterprise value of €3.5 billion -- from the Porsche and Piech families in 2011, who own 50% of Porsche. VW has the balance sheet strength to absorb the purchase, but needs to be cautious with its cash. VW has weathered the downturn well so far, but 2010 will still be challenging, as many government scrappage schemes that have boosted its auto sales this year are due to wind up.

With VW still to secure investor approval for its capital hike, the deal with Porsche might still stall. But the main beneficiary is clear. Porsche's share price rose 12% Friday; VW's preferred shares tumbled 6%.

Write to Sean Walters at sean.walters@dowjones.com


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VISO - 8/14/2009 6:13:56 PM

+2 Boost

Actually, one could say Audi is in the driver's seat. (1) The money to takeover Porsche comes directly from Audi AG not VW AG (2) Martin Winterkorn is ex CEO of Audi AG and will take over Porsche SE and the expanded VW group (3) Piech is ex CEO and engineer of Audi AG and the current chairman of the board of VAG (3) The majority of VAG's board and upper management is made up of Audi executives and those close to Audi (4) Walter D'Silva is from Audi as is the head of finance (CFO) the ex CFO of Audi AG (5) Audi has been successful in blocking Porsche at every step in terms of technology sharing, interference, and dominance, and (6) they are considering changing the name of VAG to Auto Union which is the forbearer of Audi. Interesting how historically Audi (Horch) has regained its control once again.

aarononymous - 8/14/2009 9:14:38 PM

+5 Boost

Audi Uber Alles

Joe_Limon - 8/14/2009 6:59:15 PM

+1 Boost

:) Porsche shall die, Audi has continually been limited by not overlapping performance with Porsche. If Audi is in control, I would like to see these roles reversing.

Agent63 - 8/14/2009 9:19:25 PM

+4 Boost

It's all legal issues that the general public won't understand anyways. VW and Porsche will benefit each other anyways. The media makes it sound like they're feuding hugely over this but in reality they're just making things work better. In the end the two families rule. It's just company names that are the titles. If Porsche "owned" VW it wouldn't make any difference. It's just partnerships that we don't know about. Porsche is still a great company and their cars will not be phased as much as we think.

VISO - 8/15/2009 11:00:45 AM

+3 Boost

You are correct Agent63 to a certain degree. The Piech side of the Porsche dynasty has won the battle of control of Porsche and VAG. There was a power struggle between Piech and the head of the Porsche clan (name escapes me) who supported Wiedeking (ex-CEO of Porsche Cars). Piech won out ousting Wiedeking and his CFO, subduing the rest of the Porsche clan, and swalloing Porsche under VAG. Should make no difference in terms of cars, but symbolically it is a win for Audi in the end.