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Porsche Slumps as Extended Share-Price Probe Delays Merger With Volkswagen

Date: Friday, February 25, 2011
Author: Andreas Cremer and Karin Matussek, Bloomberg

Porsche SE’s planned merger with Volkswagen AG will probably be delayed into next year because of German legal obstacles. Porsche plunged the most in 19 months.

An investigation into share-price manipulation allegations will likely push the deal’s completion into 2012, Porsche said. Stuttgart prosecutors said today their probe has “solidified” suspicions Porsche didn’t adequately inform the market between 2007 and 2009 about its intentions to take control of VW.

Institutional investors in Germany are seeking 2.5 billion euros ($3.4 billion) from the sports-car maker over the matter, according to Porsche’s annual report. Prosecutors’ findings could be used in German civil suits seeking damages. VW said last year the merger, planned to close in the second half, was also being held up by U.S. lawsuits and German tax disputes.

“Legal proceedings are proving to be more complex,” said Arndt Ellinghorst, a London-based Credit Suisse analyst with “outperform” ratings on VW and Porsche. “It’s very likely that it will happen next year because financial risks will then be more calculable.”

Porsche’s preferred shares dropped 6.60 euros, or 11 percent, to 55 euros in Frankfurt trading, the most since July 2009. VW’s preferred stock fell 3 percent to 112.45 euros.

Expanded Probe

Porsche and VW agreed to combine in August 2009 following a failed attempt by the Stuttgart-based sports-car maker to acquire its larger rival. Investors claim Porsche misled them by denying through much of 2008 it intended to acquire VW. Porsche said in October of that year it controlled most of VW’s common stock, causing the shares to surge as short-sellers raced to cover their positions. Porsche has denied the charges.

Investigators have expanded the scope of their probe into former Porsche Chief Executive Officer Wendelin Wiedeking and former Chief Financial Officer Holger Haerter to include allegations they may have taken risks endangering the carmaker’s existence, the Stuttgart prosecutors said in a statement today.

Prosecutors also extended the probe to include three people from Porsche’s finance unit over allegations they may have made false statements in talks with banks over Porsche’s refinancing and thus may have committed credit fraud, the office said.

“The further investigations are proving to be extremely complex and time consuming and will definitely not be completed before the end of this year,” the prosecutors’ office said.

Stake Acquisition

Prosecutors continue to investigate allegations Wiedeking and Haerter may have misled the public between 2007 and 2009 about their intentions when acquiring the Volkswagen stake, prosecutors said. That part of the probe regards statements made by Porsche, as well as potentially failing to disclose required information about the issue, they said. Investigators are also still looking into allegations Porsche cornered, or shorted, VW stock as a result of the omitted disclosures, they said.

Wiedeking’s lawyer Walther Graf said the allegations are unfounded. Haerter’s lawyer Eberhard Kempf didn’t return a call seeking comment. Porsche spokesman Frank Gaube declined to comment on today’s allegations.

The part of the probe looking into allegations of trading- related market manipulation was dropped, the prosecutor said. An investigation of managers of Maple Bank GmbH, which worked with Porsche at the time, was also ended.

VW in October said the combination may be delayed because of the legal and tax issues. Hedge funds last month appealed a U.S. judge’s ruling dismissing lawsuits they brought claiming Porsche cost them more than $2 billion by misleading short- sellers in its purchase of VW shares in 2008. The two carmakers must also resolve tax issues in Germany linked to any merger.

‘Cautious Assessment’

“Volkswagen concurs with the now more cautious assessment of Porsche with regards to the timing and probability of the merger,” the carmaker said in a statement today. “Volkswagen remains fully committed to the comprehensive agreement and the merger with Porsche and continues working in this direction.”

Porsche shareholders voted in November in favor of a 5 billion-euro ($6.9 billion) capital increase to facilitate a merger by lowering debt piled up as part of its earlier takeover attempt. German prosecutors’ investigations won’t impact plans to complete the share sale by May 30, Gaube said.

As the carmakers work to resolve legal and financial issues, the two are tightening manufacturing links. A VW plant in Osnabrueck, Germany, will build Porsche Boxster and Cayman models, plant director Ludger Teeken said in an interview this week. Europe’s largest carmaker already assembles the bodies for Porsche’s Cayenne sport-utility vehicle and four-door Panamera.

Deeper Integration

VW gave Porsche authority in November to run sports-car development across the group. Adding Porsche as its 10th brand may help Volkswagen in its effort to overtake Toyota Motor Corp. in sales and profitability by 2018, Bralo said.

Porsche’s next model, the Cajun compact SUV, will be based on the platform of VW’s Audi Q5 model, saving Porsche development costs. Porsche’s supervisory board will vote March 15 to build the Cajun at the carmaker’s Leipzig factory, said a person familiar with the matter, who spoke on condition he not be identified before the board vote.

“Volkswagen is moving forward to fit Porsche into its structure,” said Stipo Bralo, a Frankfurt-based analyst at SEB AG who recommends buying VW and Porsche stock. “The merger is fully underway in operating terms.”

Porsche, working with VW, has a target of doubling sales to 200,000 vehicles by 2018. The carmaker will do so by expanding the number of model lines to seven from four, the person said. Each model will have a seven-year lifespan before being replaced, allowing Porsche to bring one new vehicle to market every year, the person said. Porsche spokesman Heiner von der Laden declined to comment on the carmaker’s plans.

“Cooperation will intensify,” said Marc-Rene Tonn, an auto analyst with M.M. Warburg in Hamburg who recommends buying VW stock. “VW and Porsche have the resources to uncover new areas of business. The challenge will be to do all that without harming Porsche’s brand identity.”

To contact the reporters on this story: Andreas Cremer in Berlin at acremer@bloomberg.net; Karin Matussek in Berlin at kmatussek@bloomberg.net.