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Porsche Raises Volkswagen Stake, to Make Takeover Bid (Update5)

Date: Monday, March 26, 2007
Author: Chad Thomas and Jeremy van Loon, Bloomberg

March 26 (Bloomberg) -- Porsche AG boosted its stake in Volkswagen AG to 30.9 percent and said it plans to defend Europe's largest carmaker against possible influence from hedge funds and buyout firms.

Porsche, based in Stuttgart, Germany, paid 100.92 euros a share for the extra 3.6 percent stake, Porsche spokesman Frank Gaube said today. ``There's been a lot of speculation in the market about hedge funds or private equity coming in and buying a stake'' in Volkswagen, said Gaube. That ``would give us a lot of headaches.''

Volkswagen Chairman Ferdinand Piech, whose family controls Porsche, has increased his dominance since Porsche first bought a stake in 2005, installing Porsche executives on the board, and forcing out the chief executive officer. German politicians and family-controlled companies have protested against increased takeovers by venture capital firms, which were branded asset- stripping ``locusts'' by Labor Minister Franz Muentefering last year.

``Once again, a cunning move from Mr. Piech,'' said Juergen Meyer, who manages the equivalent of 1.5 billion euros at SEB Asset Management in Frankfurt and holds Volkswagen shares. ``If Porsche had bid, say 130 euros, for Volkswagen, every hedge fund would have jumped in and driven the price even further upward. Instead they are going the much smarter way, making this low offer and waiting until things cool down.''

Purchase Price

Porsche also is offering 100.92 euros an ordinary share for the rest of the company, 14 percent below the close in Frankfurt on March 23 that valued Volkswagen at 42.7 billion euros ($56.7 billion). The German securities regulator will determine the minimum offer possible for the preferred shares.

``The price indicates that Porsche management is acting in a rational way,'' said Daniel Broby, chief investment officer at Bankinvest in Copenhagen, which has 11.5 billion euros under investment, including 20,025 Porsche shares. ``This is a takeover by stealth and it will be a long time before we see the final endgame.''

Shares of Volkswagen today fell as much as 5.19 euros, or 4.4 percent, to 112.51 euros and were down 3.9 percent to 113.13 euros as of 1:11 p.m. in Frankfurt. Porsche rose 34.07 euros, or 3.1 percent, to 1149 euros.

Private equity firms and hedge funds have been active in the automotive industry and last year approached Continental AG, the world's fourth-largest tiremaker, about a possible takeover. Financial investors, including Blackstone Group, have been in discussions with DaimlerChrysler AG about a possible purchase of Chrysler, according to people familiar with the talks.

Credit Line

Porsche obtained a 35 billion-euro line of credit to finance the purchase of Wolfsburg-based Volkswagen, though doesn't want a majority stake at this time, Gaube said yesterday. ``We want to be able to act, to increase our stake when it suits us,'' he said.

The credit facility to finance the takeover has been arranged by ABN Amro Bank NV, Barclays Capital, Merrill Lynch International, UBS Ltd. and Commerzbank AG, Porsche said.

Porsche said in a statement March 24 that its lower offer for the common shares reflects the fact that the share price has more than doubled since it first purchased a stake.

The company exercised the purchase option to take its holding to 30.9 percent from 27.3 percent, the carmaker said in a statement today. Porsche will complete the acquisition March 28. German law requires a takeover offer to all shareholders once an investor passes the 30 percent threshold.

Future Moves

The benefit of bidding now is that Porsche is freed up to make future Volkswagen stake purchases as it sees fit. Once having made the minimum legal bid to all shareholders, Porsche is no longer required by law to present further purchase offers to all stakeholders, the company said March 24.

``With such an unattractive offer they certainly do not run the risk of winning a majority stake,'' said Christopher Kummer, the director of the Institute of Mergers, Acquisitions and Alliances at Webster University in Vienna. ``In the long run, however, anything short of a majority stake won't make any sense.''

Porsche first bought into Volkswagen in September 2005, saying it wanted to protect its partnership with its largest supplier. Since then, Porsche has pushed to gain more influence, installing Chief Executive Officer Wendelin Wiedeking and Chief Financial Officer Holger Haerter on the Volkswagen supervisory board, which is similar to an American board of directors.

`Huge Potential'

Wiedeking has said there is ``huge potential'' for productivity gains at Volkswagen, the world's fourth-largest carmaker, which sold a record 5.73 million vehicles in 2006, including Volkswagen, Audi, Seat and Skoda brand vehicles. Porsche's sales in the 2006 fiscal year ended July 31 rose 9.5 percent to 96,794 cars and sport-utility vehicles.

``Porsche wants to get the process started before we start to see good first-quarter numbers from Volkswagen and continued positive news from Audi,'' said Adam Jonas, an analyst at Morgan Stanley in London who has an ``overweight'' rating on Volkswagen shares. ``Piech and Wiedeking are looking at this as a 1,000 year investment. This isn't a hedge fund making a trading investment that they'll get rid of in a few years.''

A month ago, Porsche won a victory at the European Union's highest court, which moved to eliminate a law protecting Volkswagen from a takeover. Porsche is ``confident'' that the law will be struck down, Gaube said.

An advocate general at the Luxembourg-based court European Court of Justice Feb. 13 recommended scrapping the 47-year-old German law protecting Volkswagen because it ``restricts the free movement of capital.'' The EU court, expected to rule within the next three months, follows the recommendations in most cases.

Volkswagen Law

The so-called Volkswagen Law caps shareholders' voting rights at 20 percent regardless of the size of the stake. Porsche currently has the same voting rights at Volkswagen as the German state of Lower Saxony, which owns 20.5 percent. Eliminating the law would give Porsche more say in decisions than Lower Saxony, the second-largest shareholder.

Christian Wulff, Lower Saxony premier, said March 24 that Volkswagen benefits from having two stable shareholders who have a ``shared vision for Volkswagen.'' He made no reference to selling the state's holding.

Piech, a former Volkswagen CEO, in November helped orchestrate the ouster of Chief Executive Officer Bernd Pischetsrieder in favor of Martin Winterkorn, a long-time Piech protégé.

Piech reached an agreement last month with Wulff to remain chairman for another five-year term after he received the backing of the 10 labor representatives on the 20-member board. Piech, 69, was previously set to step down next month because of shareholder opposition to his dual roles as Volkswagen chairman and a member of Porsche's board.

Credit-Default Swaps

Credit-default swaps based on 10 million euros of Volkswagen debt rose 2,000 euros, to 21,000 euros, according to Deutsche Bank AG. Porsche credit-default swaps rose 4,000 euros to 25,500 euros. Credit-default swaps are based on corporate bonds and are used to speculate on a company's ability to repay debt. An increase indicates a worsening in credit quality.

Volkswagen is Porsche's largest supplier. The two companies build the Porsche Cayenne, Volkswagen Touareg and Audi Q7 sport- utility vehicles at Volkswagen's plant in Slovakia. Volkswagen will build the body for Porsche's planned Panamera four-door model at its Hanover, Germany, factory.

A combined entity would be run as a holding company based in the Stuttgart area, with Porsche's carmaking business becoming a wholly owned subsidiary. The new company would be converted into a European stock corporation, or Societas Europaea. The holding company would be run by Wiedeking and Haerter and would have a 12- member board.

To contact the reporters on this story: Chad Thomas in Berlin at cthomas16@bloomberg.net ; Jeremy van Loon in Berlin at jvanloon@bloomberg.net .