Porsche To Raise VW Stake To 31%

Porsche AG announced last Monday it had moved to increase its stake in Volkswagen to nearly 31 percent. The decision is aimed at protecting Europe's largest car maker from any hostile takeovers.

The move is long expected by analysts in the industry. This is because of the mandatory takeover offer under the laws of Germany. Porsche, a Stuttgart-based automaker, said it paid 100.62 euros ($134.10) a share and raised its stake in the Volkswagen by 3.6 percent. "The completion of the share acquisition is expected to take place on Wednesday," Porsche said in a statement.

In Frankfurt, the shares of Porsche rose by 2.5 percent to 1,143 euros ($1,523.28) while VW shares fell nearly 3.8 percent to 113.91 euros ($151.81). Porsche's supervisory board agreed to the plan on Saturday in part to protect Volkswagen from foreign rivals and hedge funds. Volkswagen, a Wolfsburg-based automaker and currently the world’s fourth largest car manufacturer, is famed for its iconic vehicles with distinct body parts. Famous vehicle models include the Beetle, Jetta, Golf, Rabbit and the Polo.

But Porsche has said that it does not expect the mandatory takeover offer its move triggered to be successful because it is offering only the legal minimum price, which is below the current market price. The German sports car manufacturer is VW's largest shareholder. It is followed by the German state of Lower Saxony which holds 20.3 percent.

Porsche said that it was seeking the larger stake as a response to fears that European Union judges will force the German government to repeal its law blocking a foreign takeover of Volkswagen, which is looked to as both an industrial powerhouse and a major employer. It was reported that EU took Germany to court over the issue in 2005. According to a legal official, EU may decide against Germany. The full judgment to that effect is expected to come later this year.

Porsche said it assumed "that the European Court of Justice would confirm the invalidity of the VW law and so cause the German government to change or abolish this law." The German automaker also intends to create a new holding company that will make Porsche AG a wholly owned subsidiary of the new company, which will also oversee the stake in Volkswagen. However, VW will remain independent.

Analysts in the industry spotted the rationale for Porsche's move but said it could hurt the company in the long run. "For Porsche shareholders, the acquisition of more stock in VW represents a further step in the wrong direction as far as earnings quality is concerned, in our view," said analyst Stephen Cheetham at Sanford Bernstein Ltd.

Cheetham furthermore added, "The more of VW Porsche owns, the less attractive it becomes to investors attracted by its superior growth and returns: If Porsche winds up owning a majority stake in VW, we would expect the investment characteristics of VW to dominate."