Article Financial Times, Tuesday, 28/10/08 Hedge funds panic as Porsche swoops on VW
By Richard Milne in London Porsche closes in, Page 17 Volkswagen’s shares more than doubled yesterday after Porsche moved to cement its control of Europe’s biggest carmaker and hedge funds, rushing to cover short positions, were forced to buy stock from a shrinking pool of shares in free float.
VW shares rose 147 per cent after Porsche unexpectedly disclosed that through the use of derivatives it had increased its stake in VW from 35 per cent to 74.1 per cent, sparking outcry among investors, analysts and corporate governance experts.
Max Warburton, analyst at Sanford Bernstein, said it had brought the German market into disrepute: “It is a huge question for regulators and arguably an embarrassment for all European capital markets.”
Christian Strenger, a board member at Germany’s largest fund manager, DWS, and a leading corporate governance expert, said: “It should get the politicians and supervisory authorities to think again about allowing this untransparent situation.”
Porsche revealed on Sunday that it held 31.5 per cent in derivatives in VW. Bafin, Germany’s financial regulator, recently ruled that companies were not obliged to disclose such positions where the derivatives were settled into cash rather than shares.
But the sudden disclosure meant there was only a free float of 5.8 per cent – the state of Lower Saxony owns 20.1 per cent – sparking panic among hedge funds. Many had bet on VW’s share price falling and the rise yesterday led to estimated losses among them of €10bn-€15bn.
“This was supposed to be a very low-risk trade and it’s a nuclear bomb which has gone off in people’s faces,” said one hedge fund manager.
As of last Thursday, according to consultancy Data Explorers, 12.9 per cent of VW’s shares were on loan for investors to go short and bet on them falling – the highest percentage of any German company.
“This is probably the biggest short squeeze in history,” said Mr Warburton, referring to when hedge funds have to cover their positions. It could cause even further losses as the owners of the shares who lent them to hedge funds can name their price: “It is a short squeeze to infinity.”
Shares in VW – Germany’s largest company by market capitalisation even before the rise – as much as tripled before closing up €309.15 at €520, giving it a market capitalisation of €153bn, more than all the other US and European carmakers put together.
The share price rise also caused the Dax-30 index of leading German companies to post a gain of 1 per cent despite all other 29 members’ shares having fallen yesterday.
Bafin said it had nothing to
add to comments last week that it was looking at, but not formally investigating, the share price movements in VW. The watchdog looked at a mid-September rise in VW of 27 per cent but found no evidence of market manipulation.
But a Bafin official said that the integrity of Germany’s capital markets was at stake, adding: “We have had lots of large institutional investors call us to discuss what is happening.”
Porsche’s disclosure followed a similarly unexpected move this summer by Schaeffler, a privately-owned bearings manufacturer, which disclosed it owned a controlling interest in car parts supplier Continental after building up a stake mostly in derivatives. “In both these cases, investors could argue that they didn’t have the correct information to make investment decisions,” said Mr Warburton.
Porsche accelerates towards VW control
Somewhat overshadowed by the pyrotechnics of Volkswagen’s share price was the simple fact that Porsche, the German sports carmaker, has all but reached its goal at its bigger rival.
Porsche now holds 74.1 per cent of VW directly and indirectly and is within touching distance of the three-quarters level needed to impose a domination agreement on Europe’s largest carmaker to capture VW’s cash flows. If the European Commission and European Court of Justice strike down a new version of the so-called VW law it will leave Porsche in total control.
The feeling of superiority at the sports carmaker will be enhanced after last week’s agreement between its two controlling families to stop squabbling. The car world had been set alight by the split between Ferdinand Piëch, the supervisory board chairman of VW and partowner of Porsche, and the Porsche family, which holds a majority of the sports carmaker. But Mr Piëch was forced to back down and agree to changes at VW that he had previously opposed.
All this marks the nearend of an extraordinary corporate story that has seen Porsche – which sells about 100,000 cars a year and has annual revenues of €7bn ($8.8bn) – take control of VW with its 6m sales a year and €100bn in turnover. More symbolically, it has reunited two of the biggest names in German industrial history, which can trace their roots back to Ferdinand Porsche, who designed the VW Beetle and helped found the eponymous sports carmaker.
But questions are being raised about the tie-up. Some analysts and hedge funds blame Porsche for the extraordinary volatility in VW’s shares recently that culminated in a 147 per cent leap yesterday.
Porsche has denied claims that it lent shares out to hedge funds betting on VW’s share price falling. Bafin, the German financial regulator, is looking at the share price movements.
Analysts say Porsche’s profits from derivatives will be carefully scrutinised in the future, after they made €3.5bn from that business last year – triple the amount made from selling cars.
VW’s management and workforce have also been unhappy with Porsche’s aggressive public stance. “It is fair to say that nobody appreciates a visit from Porsche these days,” says one senior VW executive.
More crucially, on the carmaking side analysts have long described the tie-up as an unequal match, benefiting Porsche far more than VW.
“There’s very limited industrial synergy between the two companies,” said Philippe Houchois, analyst at UBS.
Porsche will probably tap into VW’s portfolio of engine and other vehicle technologies as it seeks to bring down its own line-up’s CO2 emissions to reach EU emissions targets.
It may also step up cooperation: VW already assembles Porsche’s Cayenne SUV in Bratislava on the same line that makes its Touareg model and will do the bodywork for Porsche’s new fourseater Panamera.
Arndt Ellinghorst, analyst at Credit Suisse, said bad blood stored up during the long-running takeover could hamper the operation of the two companies. “There’s a huge hostile environment between the two which is a major threat to the operation. [Porsche] may have done a smart job of acquiring their stake in a very efficient way, but they’ve done a terrible job of winning over the company.”