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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