Volkswagen, Europe's largest carmaker, is considering raising up to €4 billion (Dh21bn) ahead of a takeover of Porsche to protect its credit ratings, the Financial Times reported yesterday.
"Volkswagen is planning to buy Porsche's sports car business as fast as possible and, to finance this, they are thinking about strengthening their capital base," it quoted a person familiar with the situation as saying.
The newspaper did not provide further details.
VW ordinary shares were down 2.3 per cent at 0930 GMT, the largest faller on German blue-chip DAX. They also underperformed the European auto sector index down two per cent.
"A capital increase would make perfect sense for VW and would enable it to maintain its low-A ratings on S&P and Moody's despite the planned full takeover of Porsche AG over a period of two years," Sven Kreitmair, debt analyst at UniCredit, wrote yesterday, upgrading VW bonds to "overweight" from "marketweight".
A spokesman for Volkswagen declined to comment.
Issuing new ordinary shares would dilute the 20 per cent voting stake held by the German state of Lower Saxony, however, which has to maintain this level to preserve its blocking minority.
Alternatively, the company could issue preferred shares which do not have voting rights. "If there's a capital increase, then only with preferreds, never with ordinaries," said a banker familiar with the situation.
VW preferred shares, which are more liquid than the ordinary shares, were down 3.6 per cent.
Another banker involved in the deal said the issue of a capital hike depends on whether VW would otherwise be "prepared to temporarily let its rating slip to BBB+ from A-".
VW's management had sought, but did not receive, the necessary approval from shareholders in April for authorised capital worth a nominal value of up to €400 million by 2014.
If Volkswagen wanted to issue fresh non-voting shares, it would have to receive approval at a new shareholder meeting. At present, VW can only raise its capital by a nominal value of €90m until May 2011 through the issue of new ordinary shares, assuming management would gain the approval of its supervisory board.
This would allow for the issue of 35 million new ordinary shares, which would raise its capital base by nearly 12 per cent.
Volkswagen said last week it plans a gradual takeover of Porsche, and Lower Saxony premier Christian Wulff said at the time that VW's supervisory board could approve a detailed plan on August 13 with the aim of completing the deal in mid-2011.
Volkswagen's automotive operations had net cash of €10.7bn at the end of March 2009, so the group could afford to pay the reported sum of €8bn for the acquisition of Porsche. VW had already said in early May that maintaining its existing credit ratings has top priority when considering any deal to create an integrated automotive group.
Germany's Der Spiegel reported recently that Porsche's debt totals about €14bn. VW would need to pay Porsche roughly €7bn for both the Porsche Holding auto dealership and a 49.9 per cent stake in the Porsche sports car business, it said. In order to bolster its negotiating position versus VW, Porsche said on Thursday it would seek at least €5bn in fresh funds either through cash or a contribution in kind, or a mixture of both.
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