Will Porsche’s Stock IPO Be as Popular as Its Sports Cars?
Porsche has delivered strong sales, and the stock offers investors a new way to play the electric vehicle boom.
People love Porsche’s cars, but will they love its stock?
Volkswagen (VWAGY), the world’s biggest automaker by sales and Porsche’s parent, is betting they will. It is moving forward with an initial public offering of the sports car maker’s stock that is expected to launch in the coming weeks. The billions expected to be raised will help both companies gear up for a future in electric vehicles.
In the most challenging of environments for global automakers, Porsche has delivered revved-up 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 outpaced its classic 911 model. That’s been followed by stellar performance through the first half of this year.
Now, Volkswagen hopes Porsche’s IPO can also buck the trend in the most difficult market for IPOs in 30 years.
“It should be the defining IPO on the Continent and in the world this year,” says Matt Kennedy, senior markets strategist at Renaissance Capital, an initial public offerings specialist, and manager of the Renaissance IPO ETF (IPO). “It’s a difficult market, but this is a crown jewel asset, so we’ll see.”
While the brand is a strong draw for investors looking for large, stable companies that deliver 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 will share certain top executives, and that is leading to worries about governance conflicts.
Volkswagen plans to offer 25% of Porsche’s nonvoting preferred stock on the Frankfurt exchange in late September or early October. It cautioned that the completion of the offering could be “subject to further capital market developments.”
Some of the proceeds from the Porsche IPO would help finance Volkswagen’s ambitious EUR 50 billion, five-year spending plan to build more battery plants as it ramps up electric vehicle production. Should the offering be completed, Volkswagen expects to hold a special meeting in December seeking board approval to pay a special one-time dividend to shareholders that would total 49% of the proceeds from the IPO, which would be distributed in early 2023.
Valuing the Porsche IPO at between EUR 80 billion and EUR 100 billion based on an enterprise value to earnings before income, taxes, depreciation and amortization, or EBITDA, multiple of 8 to 10 times, Morningstar senior equity analyst Richard Hilgert said the Porsche stake could raise EUR 19 billion if the shares are priced on the high side. That would make it the biggest German IPO since Deutsche Telekom went public in 1996 with a valuation of $13 billion. Italian energy firm Enel’s IPO in 1999 raised $17 billion, and currently ranks as the biggest European IPO ever.
In advance of the offering, Volkswagen revamped Porsche’s capital structure into two share classes: a 50% preferred nonvoting stock and 50% common stock with voting rights. Volkswagen also has a dual share class structure with 59% in common stock with voting rights and 41% in preferred stock that is nonvoting.
The Porsche heirs, through their investment holding company Porsche Automobil Holding (POAHY), will acquire up to 25% plus one share of the voting common stock at the offering price plus a premium of 7.5%. The holding company will also receive 25% of the nonvoting stock. That will give the holding company a total equity stake of 25% in Porsche. The special rights attached to the voting stock would enable the family members to block proposals that might be favored by a majority.
Porsche Holding owns a 31.9% stake in Volkswagen, and Volkswagen owns all 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 shares.
The Porsche family will be gaining tighter control of the company founded in 1931 by Ferdinand Porsche 13 years after they were forced to sell the sports car maker to Volkswagen. An attempt by Porsche to buy Volkswagen during the financial crisis of 2007-09 by secretly building a stake using options and derivatives backfired as banks pulled Porsche’s credit lines and it couldn’t obtain more financing.
Volkswagen management told reporters last week that the Qatar Investment Authority plans to buy a 4.99% stake on the open market under a “cornerstone investment agreement,” in which an investor subscribes in advance for a certain amount of shares ahead of the IPO. Qatar is one of Volkswagen’s major shareholders and holds 17% of the voting common shares.
In promoting the IPO, Volkswagen hasn’t demonstrated the same precision engineering that’s a hallmark of its vehicles.
Volkswagen first said it was considering the Porsche IPO on Feb. 24, the day Russia invaded Ukraine. It announced it was moving forward with the IPO on Sept. 5, the day Russia cut off gas supplies to Europe through its Nord Stream 1 pipeline. Investors have questioned the timing of the deal as global markets teeter on the brink of recession amid soaring inflation and a looming energy crisis in Europe caused by the war.
There are also concerns about corporate governance. Porsche chief executive Oliver Blume assumed the helm of Volkswagen on Sept. 1, following the ouster of Herbert Diess. Delays at its Cariad software subsidiary, which have thrown model launches off track, forced Diess’ departure. Porsche chief financial officer Arno Antlitz is also now chief operating officer at Volkswagen.
“We do not think investors will like the `CEO-dilution' just as the business tries to emancipate itself from Volkswagen AG,” says AllianceBernstein senior research analyst Daniel Roeska. “Porsche AG has an issue with overlapping governance and personal interests between Volkswagen, Porsche Holding SE, and Porsche anyway—the governance overlap has been one of the key worries of investors concerning the potential IPO. We have difficulty understanding how sharing the CEO between Porsche AG and Volkswagen AG at this point in time is a good idea for investors in Volkswagen or potential investors in Porsche AG.”
Morningstar’s Hilgert, while a fan of the special dividend Volkswagen plans to pay out and the use of the IPO proceeds to help finance the push into electric vehicles, said he is concerned about “the timing of the IPO and the current management structure.”
“Automotive sector market valuations have been negatively affected by the possibility of recession in major markets, the chip shortage, the Ukraine crisis, higher raw material costs, higher prices paid at the pump, and other inflationary cost pressures,” says Hilgert.
He notes, too, that Blume’s dual roles as chief executive at both companies “raises conflict of interest concerns.”
Still, Hilgert considers it a “high likelihood” that the IPO will be completed. Reflecting that outcome, he lowered his fair value estimate on Volkswagen shares to reflect the noncontrolling 25% stake of Porsche. At a recent $18.53, the ADRs trade at a 44% discount to his revised fair value estimate of $33, and he considers 5-star-rated Volkswagen a “compelling value.”
Sandy Ward does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.