VW and Porsche deal done - VW stays in control

[Thunder22]

After a 10-month wild ride, German auto makers Volkswagen AG and Porsche Automobil Holding SE Thursday said they reached a broad agreement to merge the premium sportscar manufacturer into VW.

VW said it will pay as much as €3.3 billion ($4.7 billion) to take a 42% stake in Porsche's core sports-car arm by the end of 2009, a precursor to a full merger of Porsche's holding company with VW in 2011.

Porsche was forced into VW's arms when its bold attempt to buy its much larger rival backfired. Porsche had bought a roughly 50% stake in VW, Europe's largest car maker, and secured options on another 20%. But the roughly €10 billion in debt Porsche accumulated in the process became overwhelming as car sales plunged in the recession.

At one point last October, news of Porsche's buying sent VW shares rocketing by almost 350% over two days.

The deal will create an integrated automotive group with 10 car brands and annual sales of around 6.4 million vehicles. The merger will boost Volkswagen's operating profit by some €700 million annually over the long term, the car maker said.

As part of the arrangement, VW Chief Executive Martin Winterkorn will take over as CEO of Porsche on Sept. 15, replacing the recently deposed head of Porsche Wendelin Wiedeking.

In an effort to pay for the deal and maintain its investment-grade credit rating, VW will sell as much as €3.3 billion in preferred shares the first half of next year, subject to shareholder approval.

To help whittle down a €10 billion debt load, Porsche also plans to sell shares in the first half of 2011 in an amount that could exceed €5 billion. To help pay for their end of the capital increase, the Piech and Porsche families that own Porsche plan to sell Europe's biggest auto-distribution business to Volkswagen.

Talks for a state-backed Qatari investment fund to buy options on Volkswagen shares from Porsche will continue, the companies said. Qatar would become the new group's third-largest shareholder once it exercises the options, after the families that own Porsche and the German state of Lower Saxony.

Lower Saxony -- which includes Wolfsburg, where VW is headquartered -- will remain the new group's second-largest shareholder. It will keep a blocking minority and name two supervisory board members in the new group.

The companies expect to finalize details of the deal in the coming weeks.