Hedge funds are busy seeking painful revenge on Porsche. According to the Financial Times, they “have gained more ammunition for their legal complaints against Porsche after the German sports carmaker revealed it had made almost $514M by placing bets on several German blue-chip shares, in addition to last year’s controversial trades in Volkswagen options.” Why is this tidbit consequential? Because Porsche had always maintained that all they had in mind was the innocent takeover of Volkswagen.
In 2008, Porsche had higher profits than sales. They made a profit of €6.8B from VW option trades and about €1B from selling sports cars. Last October, Porsche disclosed that it controlled, through direct holdings and options, 74 percent of Volkswagen. This catapulted the VW share price above the €1000 mark and inflicted large losses on hedge funds and other investors that had placed bets on a falling VW share price.
Last week, transcripts of a Porsche shareholder’s meeting in January were released. In this meeting, Porsche CFO Holger Härter said: “We have also arranged share options to generate liquidity. The underlying shares were referring to Dax companies and not to Volkswagen.”
Says the Financial Times: “His revelation undermined Porsche’s claims that its option trades in VW were driven by industrial logic as it built a stake in Europe’s largest carmaker.” Which adds extra firepower to the ammo dump being amassed.
Hedge funds have already filed legal complaints against Porsche at several courts in Germany. Bafin, the financial watchdog, is investigating possible market manipulation of VW shares. Porsche denies allegations that it manipulated VW’s share price. German prosecutors will not decide whether to launch a formal investigation into the hedge funds’ complaints until Bafin has completed its probe.
Porsche’s Wendelin Wiedeking said the company was simply using options to hedge against a rise in VW’s share price: “We are not speculators—we never have been and will never want to be.” His CFO said otherwise: The VW option trades and the revelation of further trades in other Dax shares make Porsche indeed look like a speculator.
In a separate article, the Financial Times says that there exists “some fear that the company’s risky options strategy could blow up in its face. One fear is that the owners of Porsche, the Piëch and Porsche families, might one day follow the fate of Schaeffler and Merckle, two German industrial families that pursued high-risk strategies and could soon lose control of their business empires.”
Max Warburton, an analyst at Bernstein Research, says: “Porsche had €31B in stock options liabilities on its balance sheet in July 2008. There is a huge amount of nervousness about this around.”
Holger Härter, Porsche’s chief financial officer, has pointed out that the Volkswagen stake is valued at €117 a share in the company’s books, way below its current share price of about €250. If VW’s share price may one day depart from its takeover-inflated value and come down to levels suffered by other carmakers, Porsche will go up in smoke. Hint: VW does not rule out a loss in the first quarter.
The next risk is Porsche’s ability to refinance a €10B syndicated loan that expires at the end of March.
And by the way: No further gains from VW options trades are expected. It could be a rough year for Porsche.