Porsche, VW Agree to Merge Operations (May 7, 2009)

By CHRISTOPH RAUWALD

FRANKFURT — Porsche Automobil Holding SE and Volkswagen AG, two storied names in German car making, said they will merge operations, uniting 10 auto brands into a single company.

Following a meeting Wednesday of the Porsche and Piech families, who own Porsche, the auto maker said a task force representing both companies will hammer out details of the new company’s structure over the next four weeks.

Porsche, which holds a 51% stake in VW, said the families discussed proposals laid out by the executive boards of Porsche and VW — including “capital measures” — and agreed that the two operations should be united.

Volkswagen said in a separate statement that it welcomed the two families’ decision and pledged to support the task force working on the new company’s structure.

Porsche, where the two families control 100% of the voting stock, said the task force will include representatives of VW’s second-largest shareholder, the German state of Lower Saxony, and labor representatives from both companies.

The merger plan marks an end to Porsche Chief Executive Wendelin Wiedeking’s ambitious plan to raise the company’s stake in VW to 75% and push for an agreement that would give him full access to VW’s cash reserves.

In January, Porsche, which is based in Stuttgart, raised its stake in VW, Europe’s largest auto maker by sales, to 51%. But, in doing so, Porsche’s net debt almost tripled to €9 billion ($12 billion), amid tight credit markets and slumping global auto sales, sparking fears among investors about its finances.

Porsche has been reaping huge big profit from its shareholding in VW since it started quietly to accumulate its stake in 2005, when the Wolfsburg-based company was undergoing a painful restructuring amid dwindling sales and earnings.

In the fiscal first half, ended Jan. 31, Porsche’s net profit more than quadrupled to €5.55 billion, from €1.26 billion a year earlier.

Pretax profit jumped to €7.34 billion from €1.66 billion, with the increase stemming largely from cash-settled option transactions in VW shares. Income from such transactions rose to €6.84 billion from €850 million a year earlier.

But as credit markets turned sour, Porsche faced increasingly stiff headwinds from its banks. Porsche’s €10 billion loan refinancing had a nail-biting end after a late-night conference call in March between the company and the banks because of the reluctance on the part of some lenders to participate in the deal.

Adding to Porsche’s obstacles at VW was the so-called Volkswagen Law, which gives Lower Saxony veto power on important company decisions through its stake of just above 20%. This effectively prevented Porsche from exercising the voting power it would usually have through a majority shareholding.

The German government has shown little willingness to abolish the VW Law despite criticism from the European Commission.

—Carol Dean contributed to this article.

Write to Christoph Rauwald at christoph.rauwald@dowjones.com