Porsche Takeover Builds on Volkswagen’s Strong Foundation

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By: Chad Fraser

“I’m keeping my eye on Volkswagen … and will jump to buy when I’m confident that the [European] debt crisis is over.”

— Investing Daily editor Jim Fink in Detroit Auto Show: Best Automobile Stocks for 2012

The Europeans picked up the slack during a quiet holiday week in North America, with Volkswagen (Other OTC: VLKAY) announcing a deal to buy the 50.1% of Porsche (Other OTC: POAHY) that it doesn’t already own.

Under the Porsche takeover agreement, Volkswagen will pay 4.46 billion euros (1 euro = $1.24 U.S.) for full ownership of Porsche. It will also pay one Volkswagen common share to the holding company that now owns Porsche. That lets Volkswagen classify the deal as a restructuring under German tax law, and avoid up to 1.4 billion euros in taxes that would have applied if the deal had gone through before August 2014.

The complex tax situation is indicative of the long, complicated dance that the two companies have undergone since Porsche originally tried to take over Volkswagen in 2009. That attempt failed, leaving Porsche with 10 billion euros in extra debt used to fund its bid.

Porsche Takeover Gives Volkswagen a Strong Asset

In all, Volkswagen has spent 8.4 billion euros on the Porsche takeover, excluding debt.

“VW is getting a good deal,” wrote Morgan Stanley analyst Stuart Pearson in a note quoted on Bloomberg.com. “Porsche is the world’s best premium car story.” Pearson also predicted that the completion of the Porsche takeover, expected on August 1, would increase Volkswagen’s earnings by 6 percent in 2013.

In addition, according to Reuters, the company has said that it expects savings from the Porsche takeover to add up to 700 million euros and eliminate Porsche’s debt of 20 billion euros.

The two look set to form a powerful combo. Reuters also points out that Porsche’s global sales are now 20% above their previous record, and the high-end sports car maker is struggling to keep up with rising demand. Under the ownership of VW, Europe’s biggest carmaker, it may be able to increase its production capacity.

The pair are already working together on Porsche’s Macan compact SUV, which will be launched in 2014. Volkswagen has also said that it will soon start building some Porsche models in its plants.

Back in January, Investing Daily editor Jim Fink wrote about the car industry’s outlook based on his observations of the Detroit Auto Show that month.

What he saw of the new models left him feeling optimistic, especially about the prospects of Ford (NYSE: F), mostly because it is based in the U.S., and is more shielded from the high yen and the European debt crisis, which Japanese and European carmakers, respectively, must still deal with.

Still, he cited Volkswagen as a stock to watch, citing its low p/e ratio (3.47) and staggering growth estimate of 48.8% over the next five years.

The company’s sales remain strong despite the weak global economy. In the first quarter, Volkswagen’s revenue jumped 26% from a year ago, to 47.3 billion euros. That’s mainly due to an 11% increase in sales volumes, to 2.2 million vehicles. Strength in Asia and the U.S. offset the weakness in Europe. The company ended the first quarter with cash and cash equivalents of 20.6 billion euros, up from 18.3 billion euros on December 31, 2011.

Operating income rose 10%, to 3.2 billion euros, or 6.78 euros per share, cruising past the 2.7 billion euros that analysts expected. The gains came after profits more than doubled, to 18.9 billion euros, in 2011.

Growth Plan, Diversification Give Volkswagen Serious Upside

Despite the strong sales and the Porsche acquisition, Volkswagen’s stock is likely to remain in a narrow range until the European outlook brightens.

Still, adding Porsche gives the company plenty of upside, including the ability to attract more well-heeled customers. In addition, Volkswagen’s new plant in Tennessee and its revamped dealer network should help it build on its small 3.5% market share in the U.S. There are signs these investments are already paying off: In 2011, it sold 444,000 cars in the U.S., up 23% from 2010. It aims to sell over 1 million vehicles in the U.S. by 2018.

In addition, Volkswagen has a strong presence in emerging economies like China, where it controls 18% of the market, and South America, where it has a 19% share. As The Economist points out, slowing growth in those areas, particularly in China, would hurt the company’s sales, but its broad global diversification helps lower this risk.

What’s more, Volkswagen is one of the few carmakers that continues to expand despite volatile automobile demand. By 2018, it aims to be the world’s top carmaker by volume, leapfrogging GM and Toyota. To get there, it’s spending 76 billion euros on new models and new factories by 2016.

Volkswagen ADRs jumped 6.4% on news of the Porsche takeover, to $31.79.

Article orginally posted here.

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