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Mon 27 Jul 2009 10:35 PM

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Volkswagen mulls funding options for Porsche deal

UPDATE 2: Capital increase one option under consideration say bankers.

Volkswagen, Europe's largest carmaker, is considering a capital increase as one option among many to finance its takeover of debt-laden sports car maker Porsche, bankers familiar with the situation said on Monday.

Last week bankers said Qatar Holdings was in talks about a $6-7 billion loan linked to its possible investment in Porsche.

In the meantime, issuing any fresh voting shares is seen as a problem since it would dilute the 20 percent voting stake owned by the German state of Lower Saxony, wiping out its blocking minority.

On Monday, the Financial Times reported that VW was considering raising up to 4 billion euros ($5.7 billion) ahead of a takeover of Porsche to protect its credit ratings, but did not provide further details.

"Volkswagen is planning to buy Porsche's sports car business as fast as possible and, to finance this, they are thinking about strengthening their capital base," the FT quoted a person familiar with the situation as saying.

A spokesman for VW declined to comment.

At present, VW is authorised by shareholders to raise its capital by a maximum nominal value of 90 million euros until May 2011 through the issue of new ordinary shares, assuming management would gain the approval of its supervisory board.

This would allow for the issue of 35 million new ordinary shares, which would raise its capital base by nearly 12 percent.

Yet bankers involved in the deal cast doubt on a capital increase involving the sale of ordinary shares, since it would almost certainly meet with opposition from Lower Saxony, VW's second largest shareholder, which has two seats on the board.

Even when VW had to finance a costly restructuring programme at its ailing German operations that led to thousands of job cuts in 2006, it chose to raise 1.3 billion euros in fresh cash via the sale of its Europcar business that year rather than tap equity markets.

As an alternative, the company could issue new preferred shares which do not carry voting rights. "If there's a capital increase, then only with preferreds - never with ordinaries," a banker familiar with the situation told Reuters.

If VW wanted to issue fresh non-voting shares, it would have to receive approval at a new shareholder meeting since management had sought unsuccessfully to gain the necessary approval from shareholders in April for authorised capital worth a nominal value of up to 400 million euros by 2014.

Another banker involved in the deal said the issue of a capital hike depends on whether VW would otherwise be "prepared to temporarily let its rating slip to BBB+ from A-."

VW preferred shares, which are more liquid than the closely held ordinary shares, were down just over 2 percent Monday.

"A capital increase would make perfect sense for VW and would enable it to maintain its low-A ratings on S&P and Moody's despite the planned full takeover of Porsche AG over a period of two years," UniCredit debt analyst Sven Kreitmair wrote on Monday, upgrading VW bonds to "overweight" from "marketweight".

VW said last week it plans a gradual takeover of Porsche, and Lower Saxony premier Christian Wulff said at the time that VW's supervisory board could approve a detailed plan on Aug. 13 with the aim of completing the deal in mid-2011.

VW's automotive operations had net cash of 10.7 billion euros at the end of March, so the group could afford to pay the reported sum of 8 billion for the Porsche acquisition.

VW had said in early May that maintaining its existing credit ratings has top priority when considering any deal to create an integrated automotive group.

Germany's weekly magazine Der Spiegel reported recently that Porsche's debt totals around 14 billion euros. VW would need to pay Porsche roughly 7 billion for both the Porsche Holding auto dealership and a 49.9 percent stake in the Porsche AG sports car business, it said.

In order to bolster its negotiating position versus VW, Porsche said on Thursday it would seek at least 5 billion euros in fresh funds either through cash or a contribution in kind, or a mixture of both.

M.M. Warburg downgraded Porsche to 'hold' on Monday with a price target of 52 euros. Analyst Marc-Rene Tonn argued that the pressure on its share price stemmed partly from renewed concerns it could be saddled with 14 billion euros in debt, adding that there was still no clarity over how much liquidity Porsche might receive from VW and Qatar. (Reuters)

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