Porsche faces smaller stake in VW combi

Deciding they needed one another was the easy bit. Now Porsche and Volkswagen must work out how to square a huge difference in valuations in devising a structure for the proposed combination.

Don't for a minute expect the Porsche clan to loosen its iron grip on the companies founded by their ancestor Ferdinand Porsche easily. While they have pulled off an amazing coup in getting this far, they do have an Achilles heel -- the 9 billion euros ($12 billion) in debt they've racked up amassing a near 51 percent stake in VW ordinary shares.

The result is that they simply don't have the means to buy out VW's other shareholders. This gives them little choice but to settle for a reduced stake in a combined VW and Porsche holding company. The big question for all concerned, including minority VW shareholders and 20 percent holder Lower Saxony, is just how much smaller.

You only have to look at the relative market capitalisations to see the size of the gap. This is no ordinary merger. Sports car maker Porsche Automobil Holding SE is worth just over 8 billion euros, while Volkswagen is worth around 72 billion euros.

Assume that Porsche completes a capital raising at current prices, raising up to 5 billion euros. That would lift its market capitalisation to around 13 billion euros based on current prices. On that basis it would only be entitled to 25 percent of the combined group - assuming a straight share for share exchange. So Porsche would have swapped a control position for a paltry 25 percent. Their grip on VW would be looser.

So what can Porsche's finest minds do to close the gap and maintain control? First they can haggle about a fair value for VW shares. Most analysts believe that fair value for VW shares is about 100 euros -- much lower than the market price of nearly 230 euros. This is the level to which they believe the price would most likely fall were Porsche to dispose of some or all of its stake. If Porsche ever had to make a fire sale, it could fall far further -- even opening the door to another bidder.

However, it is hard to see how they are going to be able to persuade VW to effectively rescue Porsche at a near 60 percent discount to the prevailing share price.

One way to help square the circle might be for VW to distribute some of its 10.7 billion euro cash pile to its shareholders, perhaps in the form of an extraordinary dividend.

This would both reduce VW's equity value, giving a bigger share to Porsche. It would also help the Porsche family fund its share of the planned capital increase. But this might be a difficult sell to the VW board, given the nuclear winter enveloping the car industry.

Of course, Porsche does have one ace in the hole. VW's chairman Ferdinand Piech is also one of its largest shareholders. He can be expected to argue Porsche's case tirelessly with his colleagues on the VW board, including the other major shareholder, the state of Lower Saxony. It owns 20 percent and is likely to use its stake (and the right it confers to block plant closures and investments) as a powerful bargaining chip.

Two things are clear, Piech will need to use all his legendary guile to sweet talk the political interests and the powerful VW unions, while bridging the valuation gap in a way that preserves Porsche's interest. And VW's independent directors will need to think very hard before recommending any deal to minority shareholders.

-- Alexander Smith is a Reuters columnist. The opinions expressed are his own --

By Alexander Smith

LONDON, May 7 (Reuters) -