For VW and Porsche, a High-Octane Deal

by Jim Woods | July 6, 2012 2:17 pm

German auto giant Volkswagen (PINK:VLKAY[1]) could soon be revving up sales, as well as its share price, thanks to the newly announced deal to complete the takeover of legendary sports car manufacturer Porsche. Volkswagen shares vaulted more than 6% on Thursday on the news, as traders buckled into the driver’s seat and gave the deal a big thumbs up.

According to the agreement, which is set to close on Aug. 1, Volkswagen will acquire the 50.1% stake in Porsche’s capital that it doesn’t already own from holding company Porsche SE for €4.46 billion ($5.52 billion) plus one additional Volkswagen share[2].

VW officials say the deal will likely save the joint company some €700 million ($880 million) per year due synergy and combined operations from vehicles such as the Porsche Cayenne SUV, which shares many of the same parts (including the chassis) with Volkswagen’s Touareg.

VV’s acquisition of Porsche actually represents a flipping of the script from several years ago, when Porsche failed in its attempt to takeover the much larger VW in 2009. It was a case of ill timing for Porsche, which loaded itself up with debt to make the deal just as the global economy plunged into the Great Recession.

For VW, the move will surely enhance its current bevy of luxury brands, which include Audi, Bugatti, Lamborghini and Bentley. Each of these is performing extremely well, with Audi being the top-selling luxury brand in perhaps the coveted — and still very much booming — Chinese luxury auto market. Lamborghini also is a popular brand among superrich Chinese.

Along with the news of the deal, Volkswagen officials said that integrating Porsche’s highly profitable car business would definitely have a positive impact on its bottom line going forward. However, they also said acquisition charges this year will largely offset that impact on operating profit.

According to German auto industry expert Ferdinand Dudenhöffer, director of the Center for Automotive Research at the University of Duisburg-Essen, Porsche’s growth is likely to occur much faster due to the partnership with VW. Dudenhöffer estimates that by 2020, Porsche could quadruple its sales to as many as 500,000 cars a year[3] by essentially leveraging VW’s  plans to launch a small sport-utility vehicle and other models. In 2011, Porsche sold about 119,000 cars.

Of course, no merger is without its growing pains. Sure, Porsche will be able to take advantage of the larger scale offered by VW’s behemoth operations, and that will almost certainly boost profits. However, Porsche runs the risk of losing its small-company flexibility, which is nearly always a downside for companies that get bought by larger entities.

VW’s move to bring Porsche into its fold comes at a time when U.S. vehicle sales for June[4] came in with their best June performance since pre-recession 2007. That gave automakers such as Ford (NYSE:F[5]), General Motors (NYSE:GM[6]), Fiat (PINK:FIATY[7]), Nissan (PINK:NSANY[8]), Toyota (NYSE:TM[9]) and of course, Volkswagen, reason to celebrate. And now that the deal with Porsche is official, VW is likely to be celebrating for many more months to come.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities. He does, however, own a Porsche 911.

Endnotes:
  1. VLKAY: http://studio-5.financialcontent.com/investplace/quote?Symbol=VLKAY
  2. plus one additional Volkswagen share: http://investorplace.com/2012/07/vw-to-purchase-remainder-of-porsche-for-5-9b/
  3. by 2020, Porsche could quadruple its sales to as many as 500,000 cars a year: http://online.wsj.com/article/SB10001424052702303684004577508912853303228.html?mod=WSJ_business_whatsNews&_nocache=1341587533951&user=welcome&mg=id-wsju.be
  4. U.S. vehicle sales for June: http://investorplace.com/2012/07/automakers-post-strong-sales-in-june/
  5. F: http://studio-5.financialcontent.com/investplace/quote?Symbol=F
  6. GM: http://studio-5.financialcontent.com/investplace/quote?Symbol=GM
  7. FIATY: http://studio-5.financialcontent.com/investplace/quote?Symbol=FIATY
  8. NSANY: http://studio-5.financialcontent.com/investplace/quote?Symbol=NSANY
  9. TM: http://studio-5.financialcontent.com/investplace/quote?Symbol=TM

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