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Quote Originally Posted by Financial times
Fears over Porsche's strategy gear change

By Daniel Schäfer in Frankfurt

Published: February 16 2009 02:00 | Last updated: February 16 2009 02:00

When Wendelin Wiedeking, Porsche's chief executive, opened the €100m ($128bn) company museum last month, some wondered if its daring construction might be a symbol of the carmaker's economic situation.

"This building only rests on three pillars - our structural engineers feared that it might have droopy ears," Mr Wiedeking said.

Some say the German luxury car group itself has made an equally daring financial construction with its large-scale option trades at Volkswagen, Europe's largest carmaker, which has revenues 15 times the size of Porsche's.

Analysts have dubbed the carmaker a hedge fund after it raked in a profit of €6.8bn from VW option trades and only about €1bn from selling cars in its last fiscal year.

Porsche has rejected that claim, saying it followed purely industrial logic with its option trades at VW. It used options to buy into VW over several years and lifted its stake above 50 per cent last month.

However, there is a fresh revelation that Porsche has also traded in options of other companies on the Dax index, using small price differences to generate €392m in cash.

It is more than a matter of semantics whether Porsche should be called a hedge fund or a sports car- maker. Some fear that the company's risky options strategy could blow up in its face.

"Porsche had €31bn in stock options liabilities on its balance sheet in July 2008," said Max Warburton, an analyst at Bernstein Research. "There is a huge amount of nervousness about this around."

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.

The Schaeffler and Merckle families used massive leverage to fund large-scale acquisitions. Both ran into trouble when the price of the shares that were used as collateral collapsed. It is difficult to tell if the same would happen with Porsche.

The carmaker does not disclose how much the acquisition of its 50.76 per cent stake in VW is leveraged or whether some of the shares were used as collateral for loans. One risk is that Porsche would have to write down its VW shares.

Holger Härter, Porsche's chief financial officer, has pointed out that the stake is valued at €117 a share in the company's books, way below its current share price of about €250.

But analysts said VW's share price might one day depart from its takeoverinflated value and come in line with the valuation of other carmakers.

This would be well below the price Porsche paid, given that the car sector is facing the most drastic downturn in decades.

VW does not rule out a loss in the first quarter.

The next risk is the company's ability to refinance

a €10bn syndicated loan that expires at the end of March.

Mr Härter said talks were well on track but some of the bankers involved said Porsche would have to pay hefty interest rates to extend the loans.

This comes at a time when Porsche faces rapidly falling sales, diminishing the cash flow required to pay the interest.

At the same time, no further gains from VW options trades are expected.

Bankers said Porsche's owners might even be forced to inject equity, use a loan or bring Austria's Porsche Holding, Europe's largest car dealer, into the company.

"If you give a credit to a company that has almost no cash flow, you have to have some kind of security," Mr Warburton said.

Porsche has rejected this, saying it has a large enough cushion from the value of its VW shares.

"I have never bought so low and paid so high," Mr Wiedeking said about the Stuttgart museum, which far exceeded its original budget.

He has to hope he will not have to say the same thing about VW.

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