Commentaries

Should Volkswagen demand a Magna Carta?

Magna International seems to be taking seriously threats from Volkswagen to pull its business following the Canadian car parts maker’s Opel victory.

Magna’s co-CEO Donald Walker is saying that after talking to them, most of his other customers are happy that the car parts group – which along with Russian backer Sberbank is buying a 55 percent shareholding in GM’s Opel — is able to protect their technologies.

Apparently VW is still unconvinced, so Magna will “finalising the internal procedures” and will have more talks with the German carmaker.

Walker is also stressing that Magna is not looking to compete with its clients but is simply aiming to get a good return on its investment in Opel, reiterating that Magna will remain a parts company.

There seems little doubt that Magna can manage potential conflicts, after all it already builds cars for BMW, Chrysler and Mercedes as well as making parts for Toyota, Ford and VW.

But to say Magna won’t be competing with other carmakers once it starts building Opel cars is stretching the point. Why else would you buy Opel if it wasn’t to take market share from VW and others?

Qatar will need to keep driving Porsche hard

It has taken a long time, but the Porsche clan is finally — and no doubt reluctantly — giving outsiders a say in how it runs the family firm.

The Porsche and Piech families — the descendents of Ferdinand Porsche –are selling a 10 percent voting stake in the Porsche holding company to Qatar in order to get them out of the financial mess they found themselves in when Porsche tried an audacious takeover of Volkswagen.

The Qatari investment is just one part of a complicated series of financial arrangements that are meant to lead to a merger of VW and Porsche in 2011.

As well as taking the stake, Qatar’s sovereign wealth fund is also stepping in to top up a loan to Porsche to the tune of 265 million euros and taking a huge package of cash-settled options on VW shares off Porsche’s hands.

This options package will give Qatar Holding LLC — the investment vehicle set up by the State of Qatar to make strategic and direct investments — access to a 17 percent stake in VW.

The Qataris are used to providing a helping hand when it is needed. They came to the rescue of British bank Barclays last year, picking up a stake which is now showing a hefty profit on paper.

Porsche may be a trophy asset, but Qatar should use its strong position to demand the kind of performance you’d expect from the marque.

Porsche prepares to enter Auto Union with VW

It’s been a tortuous road, but Porsche looks as though it might finally have struck a deal with VW and Qatar to sort out its debt problems.

A Reuters report says that details of a deal between Volkswagen and Porsche have been broadly agreed, with VW set to buy a stake of up to 49 percent in the sportscar maker. The Porsche marque will then enter into a new “Auto Union” as the 10th brand, under the leadership of VW CEO Martin Winterkorn.

The crucial point here is that the family-owned holding company Porsche Automobil Holding SE will get a much-needed cash injection from the sale – anywhere between 4 and 5.5 billion euros –  as well as an additional 5 billion euros from selling a package of options on VW shares to the Gulf state of Qatar.

The Porsche clan has already agreed to sell shares to raise at least 5 billion euros, so it should finally be in a position to pay off debts of more than 10 billion euros it stacked up building up a stake of just over 50 percent in VW.

That’s good news for the banks involved and eases the way towards a full merger, but minority shareholders in both companies will want to see all the details before they can really tell what their holdings are worth.

After all, VW shares are still trading at above 220 euros, when many analysts give them a fair value of less than half that — in a range of between 70 and 100 euros per share.

The end game for both Porsche and VW is to merge the two companies. And while arguments over valuation have apparently been settled, we’re not quite there yet.

Investors ignore ratings at their peril

    Rexam is delivering a nasty surprise to its shareholders, but the logic of its proposed rights issue is hard to fault.     If trading turns out to be as bad as the board expects, then the penalty payments for refinancing its existing debt will far outweigh the cost and dilution of the issue.     Broker Oriel Securities reckons the cost to Rexam if it loses its investment grade rating will be an extra 8 to 12 million pounds a year in interest payments.     Businesses everywhere are rediscovering the joys of equity, as the way to stave off the dreaded downgrade. So far this year, shareholders have put up $119 billion, according to Thomson Reuters data, with $28 billion more due.     Even cash-rich carmaker Volkswagen is reported to be considering issuing shares to bolster cash reserves and pre-empt any ratings downgrade relating to its merger with Porsche. Spanish utility Iberdrola and French construction groups Lafarge and Saint Gobain all took similar steps to bolster their ratings.     Unfortunately, credit ratings agencies are so jumpy about regulators and the risks of legal action by investors that companies can’t always bank on such moves working.     Saint Gobain launched a rights issue, but still S&P cut it to BBB from BBB+. Lafarge did worse. Fitch not only cut its rating to BBB-, it added a “negative outlook”.     One reason ratings have increased in importance is that as banks have turned off the taps, companies have turned to the bond markets, allowing the agencies like Moody’s Corp and McGraw-Hill’s S&P to cash in.     Experience has taught them caution, however, and the number of issues downgraded from investment grade to junk is on the rise. The threat of this — with the higher cost of borrowing and reduced market access it brings — is a powerful incentive to go to the shareholders. S&P has identified 75 issuers — with $255 billion of debt — in danger of losing their coveted investment grade.     The unhappy experience of Rexam shareholders is likely to repeated many times as the debt crisis unwinds, but at least it’s better than losing control of the business to its lenders.

Wiedeking Porsche exit paves way for VW

Porsche’s chief executive Wendelin Wiedeking may have been persuaded to leave in order to ease a merger with Volkswagen, but there are still major hurdles to overcome before the sports car maker finally emerges from the pits.

Wiedeking is paying the price for his disastrous plan to take over the far larger carmaker, which left Porsche with a majority stake in VW but saddled with debts of 10 billion euros ($14 billion). His departure marks a crucial turning point in a bitter power struggle between VW Chairman Ferdinand Piech and his cousin Wolfgang Porsche, chairman of the family firm.

    Wiedeking’s exit ultimately paves the way for Piech to install his own lieutenant to run the sports car maker instead of Wolfgang Porsche’s golden boy Wiedeking, who brought it back from the brink of bankruptcy in 1992.

    But before that happens, the two companies still need to agree on a structure which will allow them to make Porsche’s sports car unit VW’s 10th brand. A merger between the two companies rather than VW buying the Porsche sports car brand from the Porsche family holding company is being touted as the way forward. But although the various parts are gradually being assembled, a deal could still be some way off.

    As to be expected in this family feud, mixed messages from the Porsche and VW camps continue. The precise role of Qatar is still unclear, some insiders are insisting Porsche can go it alone with a financial boost from Qatar, while VW executives are confidently predicting  that Porsche will be absorbed into the larger company.

    Lower Saxony premier Christian Wulff says the German state will retain its 20 percent stake in VW, with Qatar to take a 17 percent stake — this would roughly fit with the Qataris taking Porsche’s VW options off its hands. But the crucial question of how much the Porsche and Piech families would own of a combined VW/Porsche has yet to be nailed down.

    VW Chief Executive Martin Winterkorn — Piech’s loyal lieutenant — says a decision on Qatar taking a stake will be taken on August 13 by the VW supervisory board. Presumably the Qataris will want a better idea by then of who they will be sharing the company with.

Wiedeking makes millions betting the ranch

It isn’t only the investment bankers who have pay packages that offer perverse incentives.

Take Wendelin Wiedeking, for instance. The chief executive of Porsche <PSHG_p.DE> enjoys a package that most bankers could only dream of. And boy does it offer a perverse incentive. Indeed, arguably, it’s one of the reasons that Porsche has got itself in such a big financial hole that it may have to be rescued by Volkswagen <VOWG.DE>, a rival carmaker in which it has built a majority stake.   Wiedeking is one of Germany’s best paid bosses. He is entitled to receive a performance-related bonus equivalent to 0.9 percent of Porsche’s pre-tax profits. He apparently secured this right when he took over as chief executive in 1993. At the time the company was losing money and almost bankrupt.   The incentive has certainly worked. Wiedeking has turned Porsche into the most profitable car company in the world. The snag is that a large chunk of these juicy profits have come from financial sources rather than boring old car-making — initially from unspecified hedging activities and more recently from trading in VW shares.

In 2008, about 80 percent of Porsche’s declared pre-tax profit of 8.6 billion euros came from VW. Much of this was unrealised paper profit on options the company held over VW shares.

Porsche’s supervisory board may have thought they were doing a smart deal, aligning Wiedeking’s interests with their own. In fact they have given him a one-way option (he doesn’t share in any losses) and paid out on unrealised profits. In reality, they have simply given him a huge incentive to bet the ranch, which he has done with disastrous consequences. No wonder some of the Porsche clan members now take a rather more dim view of their one-time wunderkind.

Wiedeking may soon lose his job. But he may still have the last laugh. His contract lasts until 2012 and Porsche may have to pay him out whether he stays in the job or not. No wonder Wiedeking chortled when asked recently whether he was going to resign. “Why should one resign if one has a well-drawn contract?” he said. Why indeed?

Piech firmly behind the wheel at VW and Porsche

However the Volkswagen-Porsche stand-off resolves itself, it looks as if Ferdinand Piech holds all the cards. That should worry VW <VOWG.DE> investors.

Just look at how things stand. VW’s chairman has an iron grip on the carmaker’s board, having struck an alliance with the unions who control half the seats on it. Meanwhile, he and some of his relatives also have a blocking stake at Porsche <PSHG_p.DE>.

Piech is in dispute with Porsche’s management and his Porsche cousins, with whom he shares control of the sports car maker. But he seems to have them in a box. Piech can stop Porsche raising money to pay down its massive 10.75 billion euro debt by issuing shares or selling assets — the possible solutions proposed by the Porsche clan. So it apparently has no alternative but to strike a deal with VW.

What does Piech want? His plan seems to be for VW to buy 49 per cent of Porsche’s sports car unit for cash, allowing the smaller company to pay off some of its debts — but leaving it pretty much as a shell company which holds a 51 percent stake in VW. Piech will then be both chairman of VW and have a blocking stake in its controlling shareholder. Nothing can be done without his consent.

Piech may seem to be beating up his own family company financially, but it would be premature to assume this. After all, his financial interests are pretty much wholly tied up in Porsche, where he is one of the biggest shareholders. By hurting it, he would be hurting himself.

There is no evidence yet that Porsche will ultimately be made to pay for its folly of attempting the debt-funded takeover of VW — a company ten times its size — which has left it in its current state. No one knows what the final terms of any deal will be. And VW has thus far only proposed the first step of what will presumably be a bigger move — a full merger with Porsche. Once Piech has control of both sides, he will have plenty of space to work out a deal that is satisfactory to his family interests.

VW’s shareholders have every reason to be suspicious. VW and Porsche are already very intertwined, with the larger company responsible for about a third of the content of Porsche sports cars. Piech is also the man who concocted the joint venture between Porsche and VW a few years ago that enabled Porsche to launch the Cayenne sports utility vehicle.

Porsche’s VW options not for the faint-hearted

Porsche may own a lot of options on Volkswagen - around 20 percent of the larger carmaker’s shares – but the sports car maker is running out of alternatives to solve the financing problems it built up by acquiring a 51 percent stake in VW.

Despite a recent report of other investors being interested in relieving it of the options, Porsche insists that talks with Qatar remain exclusive.

It’s no wonder that others are tempted by what is clearly one of the world’s best recognised marques — but with net debt of 9 billion euros and a family feud to resolve, any involvement with Porsche is not for the faint-hearted.

Then again, with a top speed of 329 kilometres per hour for the Porsche 911 GT2, neither are its cars.