Porsche Mired In Debthttp://www.forbes.com/2009/03/31/porsche-volkswagen-options-markets-equity-automotive.html
All is not well for Porsche, the German carmaker that appeared Tuesday to have made a killing from hedging shares of Volkswagen. While the company announced an astonishing 6.8 billion euros ($9.0 billion) in net profit booked on cash-settled options of Volkswagen shares, up from 850 million euros ($1.1 billion) last year, it said its net debt stood at a higher than expected 9.0 billion euros ($12.0 billion).
The value of Volkswagen shares, now 23.0% higher than at this time last year, has been driven up by expectations that Porsche (other-otc: POAHF - news - people ) would increase its 51.05% stake in the German carmaker to beyond 75.0% so that it can gain majority control under German law. The stock jumped again last week, when Porsche said it had renewed a 10.0 billion euro ($13.3 billion) credit facility that it could expand by another 2.5 billion euros ($3.3 billion).
But the company’s mounting debt pile is making a stake-raising maneuver look more unlikely. “People are questioning if Porsche is actually able to go to 75.0% with these [debt] numbers today, and some are coming to the conclusion now that it’s not possible,” said Tim Schuldt, an analyst at Equinet in Frankfurt.
Shares of Volkswagen slipped by 10.42 euros ($13.85), or 4.4%, to 225.08 euros ($299.17), on Tuesday morning in Frankfurt, while Porsche lost 1.68 euros ($2.23), or 4.5%, to 35.36 euros ($46.99).
One analyst estimates that it will cost 9.0 billion euros ($12.2 billion) for Porsche to increase its stake in VW to 75.0%.
While Porsche might seem wealthy because of the success of its options trades, none of the 6.8 billion euros it booked in the past six months is attributable to cash flow. It is essentially just a number on the company’s balance sheet, which grew as VW’s share price climbed. That is, until Porsche decides to use it to increase its stake in Volkswagen or alternatively to settle the options and cash in. Schuldt estimates the options to be worth 8.0 billion euros ($10.6 billion) in all.
Unfortunately for Porsche, either move looks unwise at the moment. If it prepares to settle the options, myriad hedge funds and institutional investors that hold Volkwagen shares will immediately short their holdings, or bet that their value will fall, drastically reducing the amount of cash that Porsche can get from its sale.
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Increasing its stake in Volkswagen also seems inadvisable since the European Court of Justice has yet to rule on Germany’s so-called Volkswagen Law, which allows a stakeholder with as much as 20.0% of a company to block a takeover. “If the Volkswagen Law is abandoned, then you don’t need this 75.0% share position, so makes sense to have the option to sit tight,” said Schuldt.
The German state of Lower Saxony is Volkswagen’s second-largest shareholder, with a 20.3% (blocking) stake, but it is widely expected that the European Court will not make its decision until at least the end of 2009, and its outcome will be a clear determinant of Porsche’s decision whether to raise its stake past 75.0%.
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Porsche, like any other automaker these days, is meanwhile struggling to sell its main product: cars. Turnover at Porsche fell in the first half of its fiscal year by 12.8%, to 3.0 billion euros ($4.0 billion), while sales dropped by 26.7%, to 34,266 units.
For now, the company is beholden to the whims of the market: “The effect on the full-year results for the 2008/09 business year will depend on the development of the price of the Volkswagen shares in the period until July 31, 2009,” Porsche said Tuesday.