Will Porsche’s IPO be as popular as its sports cars?

People love Porsche’s cars, but will they love its stock?

volkswagen (VWAGY), the world’s largest automaker by sales and the parent company of Porsche, bets they will. It is moving forward with an initial public offering of shares in the sports car maker which is expected to launch in the coming weeks. The billions expected to be raised will help both companies prepare for a future in electric vehicles.

In the toughest environments for global automakers, Porsche generated accelerated sales and profits. It had a banner year in 2021, selling more than 300,000 cars for the first time, and sales of its all-electric Taycan sedan surpassed its classic 911 model. This was followed by outstanding performance in the first half of this year.

Now, Volkswagen hopes the Porsche IPO can also turn the tide in the toughest market for IPOs in 30 years.

“This is set to be the defining IPO on the continent and around the world this year,” says Matt Kennedy, senior market strategist at Renaissance Capital, IPO specialist and manager of Renaissance. (IPO) ETFs. “It’s a tough market but it’s a crown jewel, so we’ll see.”

Will investors jump on Porsche shares?

Although the brand strongly appeals to investors looking for large, stable companies that offer solid growth, there are caveats. Concerns about a global recession are giving investors pause, as is the lack of voting rights for buyers of the new issue. Volkswagen and Porsche some senior executives, raising concerns about governance disputes.

Volkswagen projects to offer 25% of the non-voting preferred shares of Porsche on the Frankfurt Stock Exchange in late September or early October. He warned that the completion of the offer could be “subject to further developments in the capital market”.

Porsche’s IPO will fund the push for electric vehicles

Part of the proceeds from Porsche’s IPO would help fund Volkswagen’s ambitious five-year, €50 billion spending plan to build more battery factories as it ramps up vehicle production electrical. If the offer is successful, Volkswagen plans to hold a special meeting in December to seek board approval to pay a one-time special dividend to shareholders that would total 49% of IPO proceeds, which would be distributed in early 2023.

Valuing the Porsche IPO at between €80 billion and €100 billion based on enterprise value to earnings before revenue, tax, depreciation and amortization, or EBITDA, multiple of 8 to 10 times, the Morningstar senior equity analyst Richard Hilgert said Porsche’s stake could raise 19 billion euros if the stock price is high. That would make it the biggest German IPO since Deutsche Telekom went public in 1996 with a valuation of $13 billion. The IPO of Italian energy company Enel in 1999 raised $17 billion and currently ranks as the largest European IPO ever.

Prior to the offer, Volkswagen reorganized Porsche’s capital structure into two classes of shares: 50% non-voting preferred stock and 50% voting common stock. Volkswagen also has a two-class share structure with 59% voting common stock and 41% non-voting preferred stock.

The Porsche family takes on a bigger role

The Porsche heirs, through their investment holding Porsche Automobil Holding (POAHY), will acquire up to 25% plus one voting common share at the offer price plus a premium of 7.5%. The holding company will also receive 25% of the non-voting shares. This will give the holding company a total 25% stake in Porsche. The special rights attached to voting shares would allow family members to block proposals that might be favored by a majority.

Porsche Holding owns a 31.9% stake in Volkswagen and Volkswagen owns 100% of Porsche. The planned special dividend will help Porsche Holding pay for its purchase of the voting shares.

After the IPO, Volkswagen will continue to own the majority of Porsche’s preferred and common stock.

The Porsche family will strengthen control of the company founded in 1931 by Ferdinand Porsche 13 years after he was forced to sell the sports car manufacturer to Volkswagen. An attempt by Porsche to buy Volkswagen during the 2007-2009 financial crisis by secretly building up a stake using options and derivatives backfired when banks pulled Porsche’s credit lines and that she couldn’t get more funding.

Volkswagen management told reporters last week that the Qatar Investment Authority plans to buy a 4.99% stake on the open market under a “fundamental investment agreement”, in which an investor subscribes in advance for a certain number of shares before the IPO. Qatar is one of Volkswagen’s largest shareholders and owns 17% of ordinary shares with voting rights.

Timing is a problem with Porsche’s IPO

In promoting the IPO, Volkswagen did not demonstrate the same precision engineering that characterizes its vehicles.

Volkswagen first announced it was considering an IPO for Porsche on Feb. 24, the day Russia invaded Ukraine. It announced it was moving forward with the IPO on September 5, the day Russia cut gas supplies to Europe through its Nord Stream 1 gas pipeline. Investors questioned the moment of the deal as global markets teeter on the brink of recession amid runaway inflation and a looming war-induced energy crisis in Europe.

Corporate governance is also a concern. Porsche chief executive Oliver Blume took over as Volkswagen CEO on September 1 after Herbert Diess was ousted. Delays at its software subsidiary Cariad, which derailed model launches, forced Diess’s departure. Porsche chief financial officer Arno Antlitz is also now chief operating officer at Volkswagen.

“We don’t think investors will like ‘CEO dilution’ just as the company is trying to emancipate itself from Volkswagen AG,” says Daniel Roeska, senior research analyst at AllianceBernstein. “Porsche AG has a problem with overlapping governance and vested interests between Volkswagen, Porsche Holding SE and Porsche anyway – overlapping governance has been one of investors’ main concerns regarding the potential IPO We struggle to see how sharing the CEO between Porsche AG and Volkswagen AG at this point is a good idea for Volkswagen investors or potential Porsche AG investors.

Morningstar’s Hilgert, while a fan of the special dividend Volkswagen plans to pay and the use of proceeds from the IPO to help fund the push towards electric vehicles, expressed concern about “the timing of IPO and current management structure”.

“Market valuations of the automotive sector have been negatively affected by the possibility of a recession in major markets, the shortage of chips, the Ukraine crisis, rising raw material costs, higher prices paid at the pump and other inflationary cost pressures,” says Hilgert.

He also notes that Blume’s dual role as chief executive of both companies “raises conflict of interest issues.”

Still, Hilgert considers it “highly likely” that the IPO will go ahead. Reflecting this result, it lowered its estimate of the fair value of Volkswagen shares to reflect Porsche’s non-controlling 25% stake. At a recent price of $18.53, the ADRs are trading at a 44% discount to his revised fair value estimate of $33 and he considers the 5-star rated Volkswagen a “compelling value”.

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