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Merger deal ends years of VW-Porsche wrangling

Volkswagen acquiring remaining half of Porsche’s auto business for €4.5-billion

Matthias Rietschel/AP

An automotive saga that strained two proud auto makers and family dynasties came to an end late on Wednesday when Volkswagen AG said it would purchase the remaining half of Porsche Automobil Holding SE 's car making operations for €4.5-billion ($5.6-billion U.S.).

After years of wrangling and uncertainty that have overshadowed VW's bid to become the world's biggest car maker by sales, VW and Porsche managers gathered in Wolfsburg on Thursday to laud the prospective tie-up.

Porsche is poised to join a stable of 12 VW brands next month that spans truck makers Scania and MAN, luxury marques Bugatti and Bentley, low-cost car maker Skoda and motorcycle company Ducati.

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For VW the acquisition of the maker of the 911 sports car is a coup that seals the legacy of Ferdinand Piëch, VW's patriarch and chairman who is the grandson of Ferdinand Porsche, inventor of the VW Beetle.

Mr. Piëch successfully turned the tables on Porsche after the latter failed in 2008 with an attempt to acquire the much larger VW, leaving Porsche teetering on the brink of bankruptcy.

VW bought 49.9 per cent of Porsche's car making business in 2009 for €3.9-billion but the two companies were later forced to call off a planned merger because of legal risks. Now VW will acquire the rest of Porsche for a price that analysts described as a "good deal for VW." VW's shares leapt by more than 6 per cent on Thursday.

Although the acquisition is set to make a €7-billion dent in VW's €15.8-billion net cash pile – VW must assume €2.5-billion in negative Porsche liquidity such as bank loans in addition to the purchase price – VW is acquiring a rapidly growing company that boasts some of the highest profit margins in the business. VW is set to value Porsche in its books at more than €20-billion, far in excess of the purchase price.

The car makers will reap more than €700-million in expected annual synergies through closer co-operation in car development, purchasing, manufacturing and sales.

VW and Porsche already co-operate in countless areas but do so at arm's length, generating large amounts of legal paperwork that can now be torn up.

"We can concentrate on what VW and Porsche can do best – building and developing great cars," said Martin Winterkorn, VW chief executive officer. "I'm convinced that more than ever we have the ability to become the best car company in the world."

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Not everyone is delighted about the tie-up, however. German politicians have criticised VW for allegedly exploiting a loophole to avoid paying about €1-billion in tax.

By transferring a single VW share to Porsche, the transaction is set to be classed as a reorganization, not a takeover, under German law. VW is still liable for more than €100-million in taxes and it described the political complaints as "irresponsible and without foundation." If VW had waited until 2014 – as set down in the original merger agreement – it would have paid an almost negligible tax sum.

The more muted performance of Porsche SE shares on Thursday attests to a more pressing problem, however. The Porsche holding company's primary asset remains a 50.7 per cent stake in the now enlarged VW Group. Porsche will use some of the proceeds to pay down debt. But instead of returning the remainder to shareholders – as some would have liked – Porsche plans to invest in new businesses "along the automotive value chain."

Porsche and Piëch family members who control 90 per cent of voting rights at the holding recently approved changes to Porsche's articles of association to allow new investments in areas such as mobility services, renewable energy and real estate.

Arndt Ellinghorst at Credit Suisse told clients that non-voting Porsche shareholders would feel "short-changed."

"Preference shareholders would certainly have appreciated an opportunity to partake in the windfall gain directly rather than merely via the indirect benefit this transaction creates for them as owners of 150 million VW ordinary shares," he said.

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A bigger problem is that Porsche SE remains the subject of billions of euros in lawsuits brought by investors who claim they were misled when Porsche suddenly revealed in 2008 the extent of its control of VW shares. The announcement triggered a massive short squeeze in VW stock that temporarily made VW the most valuable company in the world. Wrongfooted investors were forced to pay dearly to cover their positions.

Porsche rejected the accusations but the cases are likely to drag on for years, acting as a weight on the Porsche holding stock price.

"The key issue for the Porsche SE shares is and remains the development of the litigation issues," analysts at Macquarie told clients.

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