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Volkswagen: Why Porsche’s IPO won’t be so flashy

(BFM Bourse) – Volkswagen confirmed this week the IPO of its luxury brand, which should take effect before the end of the year. But this important operation comes at a delicate time in terms of market conditions.

Porsche will soon go public. Its parent company Volkswagen, at the end of the supervisory board held on the night of Monday to Tuesday, confirmed and clarified the plan for a special listing of the manufacturer of the famous 911.

The intended float, the first stage of the initial public offering (IPO), should be completed in early September or early October, and the operation should be completed before the end of the year.

Porsche would thus be listed in Frankfurt and join other luxury car groups Ferrari and Aston Martin, which entered the Milan and London stock exchanges in 2016 and 2018, respectively.

The largest IPO in Europe since 1999

The operation must allow the value of the mythical brand to crystallize, as the market has a habit of assigning more generous multiples of value to separate activities. For Volkswagen, the Porsche listing will raise funds to finance its move to electric power…and pay off its shareholders. The group therefore plans to distribute 49% of the gross proceeds from the issue to its owners as an extraordinary dividend, with the green light of the extraordinary general meeting.

According to sources cited by Bloomberg, Volkswagen has tested the market’s appetite, and among the main stakeholders are renowned investors such as Qatar’s sovereign wealth fund or Red Bull founder Dieter Mateschitz and LVMH CEO Bernard Arnaud. According to Bloomberg, Porsche could be valued between 60 and 85 billion euros. At the upper end of this range, Porsche’s Frankfurt entry would be the biggest IPO in Europe since 2019, according to Refinitiv.

For comparison, Volkswagen’s market capitalization is currently 86 billion euros. Tesla, for its part, weighs almost 10 times, with a capitalization of 905 billion euros, and trades at more than 100 times this year’s expected earnings, compared with 4.3 times for Volkswagen and 40 times for Ferrari.

Difficult market conditions

The Porsche IPO comes at a particularly inauspicious time. The automotive space in Europe has been suffering for several weeks. In a month, the European index Stoxx Europe 600 and parts of the sector lost about 7%, and since the beginning of January it has even fallen by 21%. This decline did not spare Ferrari and Aston Martin, which lost 13.3% and 66% since the beginning of the year, or even Tesla, which fell by almost 28% in the same period.

“The timing is clearly not ideal for an IPO, 2022, unlike 2021, is not a year of stock market euphoria or an IPO, and the valuation figures floating around Porsche seem very optimistic to me. , despite the quality of the company”, explains an analyst specialized in the automotive sector. “They would certainly have a better chance of hitting that $60 billion to $85 billion range next year in a probably less risky environment.”

There are many reasons that penalize auto stocks in the stock market, cyclical in nature. “Your interest rates are going up [qui pèse sur la demande, NDLR]economic slowdown in China, fears of a recession in the United States next year, in addition to sector-specific difficulties, such as the supply of semiconductors and the increase of raw materials”, the analyst develops.

Regional elections

Adding to these difficulties are the uncertainties surrounding the gas supply in Germany, following the closure of Nord Stream 1, which are raising fears of restrictions or even rationalization to which the automotive sector would most likely be exposed. On Monday, the announcement of the closure of the gas pipeline by Gazprom shook all European car stocks.

“The weather is not ideal,” says Stifel Bank. The research office also points out that the planned date for the launch of the IPO is a few days before the regional elections in Lower Saxony on October 9. “Which could trigger changes in Volkswagen’s supervisory board and therefore potentially bring uncertainty to support for the IPO,” the establishment explains.

Lower Saxony, a German region, is the group’s second largest shareholder with 20% of the voting rights and 11.8% of the capital. However, Stifel believes that the operation should be completed, despite this adverse context.

Porsche CEO Oliver Blume said on Tuesday that his company’s IPO could give a boost to a market lacking interesting opportunities. “There is a lot of capital in the market. We think the Porsche IPO could break the ice,” he said.

The leader then made the point in an interview with Reuters on Thursday. “Despite the market conditions, the interest is huge. It’s a great success,” he said.

Management questions

Moreover, the structure of the operation, especially in terms of governance, can raise eyebrows, Stifel points out. The Piëch family, descendants of Ferdinand Porsche, the founder of Volkswagen, will take a significant stake in Porsche through their holding company Porsche SE (not to be confused with Porsche AG, the car manufacturer) up to 25% +1 units of common stock, i.e. a blocking minority. Note that Porsche’s equity will be split in half into preferred stock (with an enhanced dividend but no voting rights) and common stock for the other half.

However, Porsche SE owns 31.4% of Volkswagen’s capital and 53.3% of voting rights. In other words, the Piëch family controls a group that will sell them a large stake in its subsidiary. And Hans Dieter Pötsch combines the position of Chairman of the Supervisory Board of Volkswagen and Chairman of the Executive Board of Porsche SE…

“There could be a risk that Volkswagen sells Porsche AG too cheaply, which would be negative for [l’action] Volkswagen and positive for Porsche SE [également cotée à Francfort, NDLR]”, emphasizes Stifel. Bloomberg’s valuation leak, however, convinced the valuing bank that Volkswagen could benefit the most from the transaction, OK.

At the end of a long stock market battle that began in 2008, Volkswagen ended up buying Porsche AG 100%, after the latter itself tried to swallow its German competitor. Almost 15 years later, Porsche SE will therefore become the largest shareholder of the automotive group whose name it shares…

[Note: les cours et éléments de valorisation ont été arrêtés vendredi en début d’après-midi]

Julien Marion – ©2022 BFM Bourse

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