Sonntag, 3. Mai 2009

Big Trouble in Zuffenhausen?

Not too long ago, everybody was looking at Porsche in awe: With their very own financial wizardry, they had somehow managed to outwit the world's hedge-funds, seemingly taking over Volkswagen for free, and even made many VW employee shareholders quite rich as a pleasant side-effect.

Porsche's Annual Report as of 7/08 (Porsche doesn't publish interim financials) shows some pretty impressive figures:

The company posted a pre-tax profit of 8.6 bn € on sales of 7.5 bn €. How? Well, they booked 19.3 bn € "Erträge aus Aktienkurssicherung" (earnings from share-price hedging transactions), which came mainly from "Aktienoptionen und Aktientermingeschäften" (stock options and stock futures).

As for the balance-sheet: Straight equity went from 8.7 bn € to 15.1 bn €. Not bad. Except that financial debt also skyrocketed from 6.5 bn € to 16.4 bn €. And the biggest asset is 18.4 bn € "derivatives". Presumably refering to all those stock options and stock futures.

So much for "ancient history" (as in: the 7/08 annual report).

Fast forward to today:

Der Spiegel reports that Porsche cannot afford to exercise its remaining VW stock options, unless it is somehow able to raise additional 3.3 bn €. If the options are not exercised, the banks will sell the VW stock they hold (for the purpose of being able to fulfill the option contracts), and VW's stock will tumble. This in turn means that Porsche will have to write off "many billions".

Hmmmm. This is a bit mysterious: As long as VW is still "at equity" in the Porsche balance-sheet (it was as of 7/08), the VW stock price has no effect on the balance-sheet valuation of its VW stake. But of course the value of Porsche's remaining derivatives might suffer if the VW stock tumbles. And considering that the balance-sheet value of their derivatives was 16 bn € not so long ago (though we don't know where it stands today), that can indeed be a bit... problematic. So I suppose this is what they mean when they talk of impending write-offs: The rise in VW's stock that Porsche itself engineered caused last year's profits, but a drop will have the reverse effect, because many (most?) of those derivatives are still there. Too bad that (presumably) some of the money is no longer there, as it has been used to buy more VW stocks. Creating something out of nothing apparently didn't work out after all.

(How many VW shares does Porsche hold? As of 7/08, it held 30.3 %. This report says Porsche reached 42.6 % in late October, not including stock options. And according to VW itself, Porsche held 50.1 % of voting rights and 37.4 % of paid-up capital as of 12/08. As for VW's share price: It currently trades around 20 % higher than at Porsche's 7/08 balance-sheet date, and IMHO is rather expensive based on fundamentals as well as compared to industry peers. The crazy stock-price gyrations which saw VW shooting up from 200 € to 900 € took place in Q4, and I have no idea if Porsche managed to make "profitable use" of them in any way.)

And let's not forget that Porsche also has a core business: Making Porsches. Which, unsurprisingly, is doing not too well right now: According to this source, sales in the all-important US market are down nearly 30 % in year-to-April. Sounds like a considerable cash-flow-strain from the operating side of the business.

So what to do? According to Der Spiegel, two scenarios are currently in discussion by Porsche and VW: One is to merge the two companies (and to raise money from Katar, which would become a major shareholder), and the other is for VW to buy Porsche. According to this report, VW has already offered to buy Porsche for a cool 11 bn € (that would be less than 7/08 balance-sheet equity. But of course we don't know if balance-sheet equity is still anywhere near that number. A lot can happen in 10 months. And in any case, Porsche's car business was recently hived off into a separate subsidiary company, and presumably VW would buy that subsidiary, not Porsche SE).

How quickly things change: Just when people thought VW was one of the few major automakers with a decent balance-sheet, they propose to go out and spend 11 bn € for an irresistible M&A deal...

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