Porsche gets a lifeline from Qatar
Qatar's sovereign wealth fund's offer of $10 billion (Dh36.7bn) to acquire a 25 per cent stake in Porsche Automobil Holding and options on Volkswagen shares currently held by Porsche provides a much needed solution to the German car manufacturer. The investment by Qatar Investment Authority will allow the sports car producer to reduce its problematic level of debt significantly.
Both Porsche and VW are still battling for control of one another but the large injection of funds from Qatar boosts Porsche's position. Volkswagen has offered a bid of $5.5bn to acquire a 49 per cent stake in Porsche. Porsche currently owns 51 per cent of VW but an imminent shareholder and boardroom showdown will soon decide the ownership structure.
Porsche has been struggling with $12bn in debt together with falling sales and profitability. Part of the debt has been driven by the company's strategy of increasing its stake in VW, Europe's biggest car maker and historically linked to Porsche through its founder Ferdinand Porsche. Porsche's goal is to create an integrated car group with VW. Other sovereign wealth funds, including China and Russia, are believed to be interested but Porsche is keen on working with Qatar.
Porsche's problems have in part been linked to its stake and options in VW. Porsche's main assets are the car company and its VW stake. The car company is worth around €7bn (Dh35.8bn) and the VW stake significantly more at the current valuation. Porsche currently controls roughly 70 per cent of VW, the 51 per cent direct stake and a further 20 per cent under option. Together with the state of Lower Saxony, which controls another 20 per cent, it has roughly 90 per cent of the issued ordinary shares. This has squeezed the market and supports the share price at unsustainably high levels. Were Porsche to try and strengthen its financials through selling some shares, the share price would likely fall significantly thereby undermining its own value.
Without the Qatar investment money, Porsche would certainly struggle financially and would be very vulnerable to a reverse takeover from VW. Porsche has been targeting the takeover of VW for some time. It acquired an initial 20 per cent stake in the company in 2005. Porsche continued to buy options on more shares, and many hedge funds that had been short-selling VW ran to close their positions. The panic-buying sent VW's shares soaring and gave Porsche a $9.3bn windfall from the sale of options.
The cost of acquiring the extra shares in VW contributed to Porsche's debt pile. Strapped for cash in the middle of a recession, Porsche accepted a €700 million loan from VW in March 2009. However, VW provided a quasi-ultimatum to Porsche to either agree to merger plan or repay the loans. VW has also offered to acquire half the sports carmaker for reportedly $5bn.
Porsche's business has been hit by the global financial crisis. For the period to end April 2009, the Porsche Group sold 1,405,584 vehicles (three months for VW, nine months for Porsche). In the first nine months of the current fiscal year, the Porsche Subgroup was unable to escape the general downward trend. Sales fell by 27.6 per cent to 53,635 vehicles compared to the same period last year. Sales in the Porsche Group, including the reported three-month figures from VW, totalled €28.4bn. In the Porsche Subgroup, sales decreased 15 per cent down to €4.6bn.
When looking at the individual models in the Porsche Subgroup, the 911 experienced a sales decline of 18.2 per cent, down to 20,254 units. Sales of the Cayenne dropped 25.1 per cent, down to 24,689 vehicles sold. Sales of the Boxster model, including the Cayman, plummeted 46.7 per cent, down to 8,692 units. A look at the distribution of sales worldwide shows no region has remained untouched by the strong downturn in the automobile markets. In Germany, sales in the Porsche Subgroup fell in the first nine months of the fiscal year by 18.7 per cent, down to 7,685 units, the decline in North America was 30.1 per cent with 17,597 vehicles sold. In the other regions of the world, the Porsche Subgroup sold 28,353 units or 28.1 per cent fewer vehicles than the year before. Production also fell significantly in the period, with the Porsche subgroup production down by 25.5 per cent.
Even if the Qatar move is successful, the outlook for the industry remains challenging. However, Porsche has some promising developments. Sales of the new Panamera model begin in September, with other plans including the development of a hybrid and enhancements to existing models.
Qatar appears as though it may have successfully come to the rescue of Porsche and, through it, forming an automotive alliance between the core businesses of Porsche and VW.
- The author is a US-based commentator on business issues
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