Volkswagen (‘VW'), the world’s second-largest carmaker by volume, has announced plans to float one of its most historic and luxurious brands – Porsche. In what could become Germany’s largest-ever Initial Public Offering (IPO), VW hopes to raise at least €20bn from floating a quarter of Porsche.
Predicted to occur as soon as Q4 this year, Porsche is expected to be valued at between €80-90bn. Below are several reasons why you should keep an eye on this deal.
Porsche’s stellar performance
Described as “catnip for footballers, bankers in bonus season, and other well-heeled sorts”, Porsche has demonstrated remarkable adaptability. Herbert Diess, VW chief executive, stated that “Porsche performs in a league of its own.”
While Porsche accounted for just 3.5 per cent of all the deliveries made by Volkswagen in 2021, the brand generated 12 per cent of the company’s overall revenue. This has been attributed to the success of the brand’s electrification – selling more silent electric Taycan models last year than its infamous 911’s.
It has been predicted that combustion engine models will account for less than a fifth of the sales by the end of the decade. Given its robust performance, Porsche’s IPO is predicted to eclipse electric car maker Rivian’s $12bn NASDAQ debut (2021).
A complicated shareholding structure
Comprising the Porsche-Piëch family, powerful unions, the German state of Lower Saxony, and 12 independently managed motor brands, the shareholding of this IPO is complicated, to say the least.
Firstly, one must clarify the difference between Porsche AG and Porsche SE. Porsche AG is what VW is planning to float – it is Porsche, the automotive manufacturer, as you and I know it. In contrast, Porsche SE is the investment vehicle (which is confusingly already listed) of the Porsche-Piëch family. It owns 53.3 per cent of VW shares which carries voting rights.
Porsche AG’s IPO will adopt a dual-class listing structure, in line with VW. This means that half the shares will be ordinary shares (with voting rights) and half will be preference shares (with no voting rights).
The Porsche-Piëch family will acquire just over 25 per cent of the ordinary shares, at a modest 7.5 per cent premium to the listing price.
A further 25 per cent of the non-voting preference shares will be offered to the market. As Qatar’s sovereign wealth fund, a current VW shareholder, aims to become a “strategic investor” in Porsche AG, they are likely to acquire 50 per cent of these (12.5 per cent).
Therefore, only 12.5 per cent of ordinary shares will be available to the public to invest in. It is therefore practically impossible for any external shareholder to gain a sizeable shareholding. This means that there will be significantly limited scope for shareholder activism or takeovers, as recently demonstrated by Elon’s $44bn acquisition of Twitter.
The motivations for going public
Both Porsche and VW are likely to be under pressure as Tesla continues to emphasize its new Germany-based Gigafactory – roughly one hour away from VW’s Wolfsburg headquarters.
The move, as Diess says, would give Porsche greater “entrepreneurial freedom.” It would provide “additional flexibility to further accelerated the transformation” to electric vehicles.
It would also allow Porsche to realise its full value. Volkswagen itself is only currently valued at approximately €100bn, just above the anticipated valuation that Porsche AG will achieve on its own. Volkswagen shares have lost a third in value over the pastyear and continues to underperform the wider market.
The Porsche-Piëch family has been rumoured to be motivated by the desire to “own an asset like Ferrari, LVMH and Hermes.” The IPO will allow the family to regain a direct hold of the historic heirloom, which the family was forced to cede to VW in 2012 following a failed takeover attempt following the financial crisis.
The Risks
However, the IPO is not without its risks.
Firstly, one analyst has remarked that “VW does not have a flawless record when it comes to mergers and acquisitions, to say the least.” This is reflected by the fact that there is no clear business case for the IPO.
Considering that Porsche already mints €15bn in free cash flow a year, raising €20bn from an IPO seems to be an unnecessary move. With VW planning to kick out half the IPO proceeds as a dividend, a large chunk of the money raised will likely be used by the family to purchase its ordinary shares.
Furthermore, the company will also be forced to distribute a one-off €2,000 bonus to roughly 130,000 German employees in an attempt to placate the unions that effectively control the company’s supervisory board.
There is also likely to be market volatility stemming from Russia’s invasion of Ukraine. VW has already paused some manufacturing in the face of material shortages caused by the conflict.
What do the lawyers do?
Lawyers will carry out due diligence on issuers and draft the prospectus. This is a document that provides information about the company, its finances, and identifiable risks.
They will also negotiate the approval of a listing on the stock exchange – abiding by its rules. As soon as a company undergoes an IPO, it will be subject to all the rules and requirements of a public company, so the necessary organisational structure must be in place before then.
Volkswagen is being advised by Linklaters. Porsche is being advised by Freshfields Bruckhaus Deringer. Porsche’s supervisory board is being advised by Sullivan& Cromwell.
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