A decade after one of the craziest takeover battles in history, a merger between Volkswagen and Porsche still hasn’t happened. The end isn’t yet in sight, but a court case starting in June should remove a major roadblock. Porsche investors stand to make a handsome return as the route clears.
Operationally, the companies have already merged. Factories once owned by Porsche Automobil, whose founder Ferdinand Porsche also designed the VW Beetle, have belonged to the VW Group since 2012. But Porsche lives on as a listed holding company that owns a slight majority of VW voting shares.
This odd arrangement dates back to a takeover saga a decade ago, when Porsche borrowed heavily to accumulate VW stock as a prelude to a daring acquisition. When Porsche announced its intentions, VW shares soared and hedge funds betting against the company were caught in a nasty short squeeze. But the strategy backfired for Porsche too, when banks called in loans that funded the takeover effort. VW ended up bailing out Porsche in exchange for a stake in its car business.
A full merger was expected until some investors, notably Paul Singer’s activist hedge fund Elliott Management, filed lawsuits against Porsche, accusing it of cornering the market in VW stock. The legal risks proved impossible to value, forcing executives to call off the deal.
Porsche has since bought a few technology ventures, but its balance sheet is still dominated by its 52% share of VW voting stock. This is worth €26 billion ($31 billion), nearly all of Porsche’s roughly €27 billion in assets. Porsche’s market capitalization is around €21 billion.
The opportunity for investors lies in this €6 billion gap. Legal claims against Porsche currently total €6.3 billion, calculates Barclays automotive analyst Kristina Church. But that massively overstates what Porsche will likely pay. The company has already won seven court cases relating to the aborted takeover.
The bulk of outstanding claims will be resolved by a long-stalled German court case, backed by Elliott and others, that restarts on June 5. The discount at which Porsche shares trade should narrow as the case moves ahead.
Even if the two companies don’t merge, investors can make a fat return. As a pure VW holding company Porsche would likely trade at a tight discount. There is a precedent: Heineken Holding, which owns a controlling stake in Heineken, the world’s second-largest brewer, changes hands just 3% below book value. If Porsche stock traded at a comparable level, the return to investors would exceed 20%.
Investors can bet on the discount closing by buying Porsche stock and selling VW’s shares short. Alternatively, they can buy Porsche as a doubly discounted way into VW, already one of the cheapest stocks around, on six times prospective earnings.
Why buy a VW when you can spend less on a Porsche?