Volkswagen plans to raise 4 billion euros to help fund its takeover of the sports car making business of Porsche. The German car maker is asking its shareholders for the money, but offering them preference shares, which have identical economic rights but no votes.

It is easy to see why VW has chosen this route. The group’s largest shareholder, Porsche, which controls 53 percent of the votes after a botched takeover attempt, doesn’t have bags of cash to pump into VW. It is, after all, selling the sports car business to repay the heavy debts it ran up building its stake in the first place.

By selling only voteless shares, VW (which is chaired by one of Porsche’s controlling shareholders, Ferdinand Piech) is allowing Porsche to cling to control whether or not it subscribes a euro.

But there’s also a good financial reason for selling the prefs rather than ordinaries.

First, the prefs are cheap relative to the ords. If you compare the price/earnings ratios of the two classes, the prefs trade on an earnings multiple of under 7 times against more than 11 times for the ords. It is a better financial deal to subscribe to the cheaper class than to the more expensive one.

Second, the very act of issuing new prefs may cause that discount to narrow — or even turn into a premium. While the two classes of VW share have identical economic rights, the prefs have generally traded a discount — of around 40 percent. This is mainly because there are fewer of them in issue (105 million vs 295 million). And unlike the ordinary shares, they are not included in Germany’s DAX stock index.

Thanks to Porsche’s stake-building, the ords are now chronically illiquid with more than 85 percent in the hands of three investors — Porsche, the Qatar Investment Authority and the government of Lower Saxony in Germany. They are expected to lose their membership of the Dax.

The number of prefs outstanding is likely to increase dramatically if the issue goes
ahead. It could almost double if VW raises 4 billion euros at a 40 percent discount. That would make the class big enough to be eligible to enter the Dax.

In a situation where only about 40 million shares were available for outsiders to buy,
versus 200 million odd prefs, liquidity would be likely to shift to the latter class. That was the situation with SAP, a German software company, whose founders controlled a majority of the ords, while institutions owned the prefs. Before the two classes were merged in 2001, the prefs traded at a premium of 20 percent to the voting stock.

Clearly, if VW experienced such a shift, it would not just be a case of the prefs going up — the ords would fall too. But with the discount between the two classes standing still at about 40 percent, there is plenty of scope for the prefs to appreciate.

That may not be enough to reconcile shareholders to the controversial Porsche deal, in which the pref holders have no say. Indeed the deal may increase calls for better corporate governance at VW. But it may reconcile pref holders to the idea of putting up the money.