VW prefs don’t deserve DAX treatment

November 10, 2009

Volkswagen’s merger with Porsche has exposed a bizzare quirk in the Deutsche Boerse’s index requirements, which could allow the carmaker’s preference shares to replace its ordinaries in the flagship DAX equity index.

Preference shares have no place in blue-chip equity indices. Their dividends must be paid before any distribution to ordinary shareholders, but they have no right to anything further, often lack voting rights, and escape most of the disclosure requirements imposed on ordinary shareholders.

 The latest twist in the VW/Porsche road trip is Qatar’s sale of half of some 50 million VW preference shares it has accumulated. It is concentrating its investment on VW’s ordinary shares, where it is aiming to achieve a holding of 17 percent.

This will mean more than 90 percent of VW’s voting shares will be held by the Porsche clan, the state of Lower Saxony and the Qataris. With a free float of less than 10 percent, the ordinary shares will no longer qualify for DAX inclusion.

But VW’s preference shares could then qualify under the Deutsche Boerse’s rules, assuming their market capitalisation is larger than that of other German companies and the stock is liquid.

However, Qatar’s revelation that it held almost 50 percent of the prefs and is now selling half of them, makes that prospect less likely. The pref shares fell by more than 13 percent as a result of the sale by Qatar Holding, the investment arm of of the country’s sovereign wealth fund.

This has reduced the market value of the prefs for now and would put the prefs behind other prospective DAX entrants such as HeidelbergCement in terms of market capitalisation.

This could give the authorities the chance to amend the rules to keep prefs out of the index in future. Unfortunately, the VW prefs could yet make it into the index. The company plans to raise the money it needs to buy Porsche’s sports car business by issuing up to 135 million new preference shares, thereby enlarging the free float and potentially the market cap.

Deutsche Boerse must be secretly hoping that VW pref shares fall further, saving them further embarrassment. If nothing else, the possibility should spur them into changing the index rules before someone else invents a better measure of the German equity market.

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