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Why Volkswagen buyers get a Lamborghini for free

06 July 2022 - 08:30 By Chris Bryant
The market capitalisation of Volkswagen, which owns 100% of Porsche, has shrunk this year to less than €80bn, which means the remainder of a group that includes Audi, Lamborghini and Bentley essentially comes for free.
The market capitalisation of Volkswagen, which owns 100% of Porsche, has shrunk this year to less than €80bn, which means the remainder of a group that includes Audi, Lamborghini and Bentley essentially comes for free.
Image: Krisztian Bocsi/Bloomberg via Getty Images

More than 70% of the roughly 1-million Porsche 911 sports cars built since the 1960s are still on the road. While one wonders what happened to the others, it shows 911s are prized by collectors and tend to hold their value. Alas, one can’t say the same about parent company Volkswagen AG’s shares.

Porsche has been touting its strengths ahead of an initial public offering planned for later this year. Owing to its bumper cash flows and big strides in electrification — the battery-powered Taycan already outsells the 911, and Porsche is targeting more than 80% of its car sales to be electric vehicles by 2030 — a valuation of around €80bn (roughly R1,394,235,453,403) looks attainable, according to analysts and my own back-of-the-envelope calculations. 

But here’s another eye-catching statistic: The market capitalisation of Volkswagen, which owns 100% of Porsche, has shrunk this year to less than €80bn, which means the remainder of a group that includes Audi, Lamborghini and Bentley essentially comes for free.

VW aims to leapfrog Tesla Inc in electric vehicle sales within three years, but even with Elon Musk distracted by his Twitter Inc bid, Tesla is worth more than nine times its German rival. Although VW can’t do much about investors’ recession worries, it must do more to ensure its mastery of software is as great as its mechanical engineering. 

To be sure, VW has often sold for less than the sum of its parts, in part due to its wretched corporate governance. (1) Yet selling a 25% stake in Porsche was supposed to help VW unlock value. There’s no sign of that happening yet. Even though the tech bust has taken the air out of near revenue-less auto startups, this hasn’t translated into greater investor appreciation for more established and profitable automakers.

Among its European peers, VW’s shares have declined the most over the past 12 months, and the stock is priced at an abysmal four times forecast earnings. 

Some of this weakness likely reflects skepticism that the Porsche transaction will proceed as planned: VW and Porsche remain committed to the fourth-quarter timetable but it’s hardly an ideal moment to pull off one of the largest-ever European IPOs. Last year’s IPO feast has become a famine.

The overly complicated deal structure seems primarily designed to let the Porsche families gain more control over a prized asset, rather than optimise Porsche’s potential valuation, and rising interest rates threaten to inflate their borrowing costs to acquire shares.

But I don’t think Porsche is the problem. VW car sales tumbled more than 25% in the first five months of 2022, a much bigger decline than some rivals suffered. Meeting full-year guidance for a 5%-10% annual sales increase will therefore be challenging, notwithstanding rapidly improving semiconductor availability and VW’s large backlog of orders.

The group’s premium brands demonstrated their pricing power in the first quarter and dealer inventories remain low, which bodes well for this year’s cash flows. However, VW’s core mass market brand would be vulnerable if there’s a recession due to the difficulty of fully passing on raw material and labor cost increases to customers.

These aren’t the only headaches VW faces. Its market share in China is shrinking, and it’s not clear Covid-19 lockdowns and parts shortages are entirely to blame. VW’s electric vehicles have yet to excite Chinese customers, and it faces increasingly tough local competition. Shifting German political attitudes toward China aren’t helping.

VW is also struggling with software. CEO Herbert Diess believes VW must develop a proprietary group-wide software stack rather than rely on Google or Apple. But despite massive investment — its Cariad unit has 5,000 employees — the transformation isn’t going smoothly.

Key models such as the electric Porsche Macan have been delayed by software issues, triggering tensions with the group’s premium brands. VW is therefore having to develop two entertainment and automated driving systems in parallel — a typical VW compromise that doesn’t come cheap.  

Porsche hasn’t hid its frustration about the software delays, which don’t help its IPO valuation aspirations. They also explain why VW is still valued like a metal-basher rather than a tech leader. Unlike a 911, VW shares aren’t for collectors: They’re for masochists.

(1) This isn't the only valuation oddity: VW’s ordinary (voting) shares fetch a large premium to the preference (non-voting) shares. Meanwhile, the Porsche SE family holding sells for far less than the value of its 32% economic interest in VW.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Previously he was a reporter for the Financial Times.

More stories like this are available on bloomberg.com/opinion


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