Porsche and Volkswagen: Investor interest in the ongoing saga

Porsche (PAH3) and Volkswagen (VOW) continue their machinations with a planned full merger expected in the second half of 2011. They are a special situation AND a fundamental growth story but only for the brave given their tumultuous past history on the stock market. We will look to see if professional investors are taking any interest and if so how.

Having closely monitored the Volkswagen short squeeze in October 2008 we are familiar with the painful past when it comes to predicting the share price of VOW. But, on the basis that it is better to get even than get mad, it is worth investigating whether there are some opportunities at present. Volkswagen has an ordinary (VOW) and a Preference (VOW3) share in issue while the main volume goes through a Porsche Pref share (PAH3). There is also some short selling action in the Volkswagen ADR (VLKAY). If you add a recent $6.5bn share sale by Porsche and a rights issue next year, there are relative value trades galore.

The case for the short sellers hinges upon the US courts upholding a lawsuit accusing Porsche of secretly buying shares in VW in 2008 that led to unforeseen losses. Meanwhile, Porsche are not gambling upon this decision for their plan B, to not proceed with the merger but sell their luxury car making arm to VW. The other issue is that a merger leads to $2bn in taxes by 2014 but this could be $1bn via a put/call merger structure.

But now for the data examination, the most dramatic movement in securities lending flows of late occurs in Volkswagen’s ADR (VLKAY). In late October there was a simultaneous movement in both the supply and the demand. Funds that lend bought 1.5m shares from nothing and funds who borrow took hold of 300k shares. Volume was high during this period implying that some of this must have been short selling and institutional buying. Could there be a currency arbitrage here if the Euro/USD exchange rate widens further?

At a similar date in late October, we saw a drop in the quantity of Volkswagen’s (VOW) ordinary shares on loan (from 4.2m to 2.3m) which was around the time that Porsche successfully raised $6.5bn being a precursor to the merger by reducing its debt. This has since risen but is lower than normal. Meanwhile, short selling is also low in VOW3 (the pref) - hardly surprising given the 95% price increase this year and certain analysts suggesting the price can climb a further 16 Euros higher. Conversely, the long only funds who lend are either profit taking or uncertain of VW’s future since they are selling their shares in the Pref if you look over the last 6 months going from 48m shares to 38m shares, which represents 23% of those in issue.

Porsche’s Pref share price (PAH3) is up 36% this year after a recent spike. There has been a concurrent increase in stock on loan from 3% to 9% of all shares. There was a recent dividend but the yield was small meaning this could be short selling. Very little is happening in Porsche’s ADR (POAHY).

There is no obvious theme emerging here however it is as well to throw our info on the table since investors tend to be fed on scraps when it comes to these two German powerhouses. Note also the recent news that family shareholders in another European company not known for transparency – Hermes – are forming a new holding company with preferential shares. The plot thickens.

For users of the Bloomberg terminal, we have attached a brief User Guide which illustrates how to conduct analysis on one of the stocks featured above. Click here to read.