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Legal, tax risks could stop VW-Porsche merger, VW document says

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Legal, tax risks could stop VW-Porsche merger, VW document says

April 9, 2010 06:01 CET

UPDATED: April 9 10:15 CET

FRANKFURT (Reuters) -- Volkswagen AG's merger with Porsche Automobil Holding SE still faces significant legal and tax risks, according to details from VW's prospectus for last month's capital increase.

The risks stem from potential tax liabilities and hedge fund lawsuits alleging former Porsche executives manipulated markets during the Stuttgart-based company's attempted takeover of VW, Europe's largest automaker.

These risks could force the companies to delay or abandon a planned merger of Porsche SE into VW next year, VW said in its prospectus published in late March.

A spokesman for Volkswagen on Thursday said its plans to merge in 2011 "have not changed".

A spokesman for Porsche says the risks listed in the prospectus stem from a legal document which lists "every possible risk" even if the likelihood of these risks materializing is "limited."

A banker familiar with the matter said it was too early to say whether Porsche and VW's merger plans needed to be delayed.

Another banker said the level of risks factors listed in the prospectus was "unusual."

In a note published on Thursday, Bernstein Research analyst Max Warburton said the risks could force VW to pay cash for a remaining 50.1 percent stake in Porsche SE's sports car business, Porsche AG.

This, in turn, could be bad for Porsche and VW.

For Volkswagen, a cash deal may mean "significant indebtedness or the need for a further capital raising," Warburton wrote.

Porsche insolvency feared

A cash deal would also probably trigger significant writedowns related to Porsche, Warburton said.

VW's prospectus says the damages sought by hedge funds for alleged breaches of capital markets rules could "place a considerable burden on Porsche's financial resources and liquidity position, and if substantial in magnitude, could even lead to the insolvency of Porsche Automobil Holding SE."

In January a group of investment funds sued Porsche SE and two former top executives accusing them of fraud in a "short squeeze" that caused the funds to lose more than $1 billion.

Potential liabilities at Porsche SE -- the family-controlled holding company -- could prevent the planned merger, VW said in the prospectus.

"The merger may not be possible at all, or may only be carried out at a later date, and the planned target structure of the integrated automotive company with Porsche may not be achieved or may only be achieved at a later point," it said.

Porsche SE racked up billions of euros in debt in an attempt to acquire 75 percent control of VW's votes, leading to the dismissal of Porsche's two top managers, CEO Wendelin Wiedeking and finance chief Holger Haerter, and what in effect is a reverse takeover by VW.

The first step was selling to VW a 49.9 percent stake in Porsche AG sports car business.

A summary of the VW-Porsche deal as set out so far


-- VW acquired a 49.9 percent stake in sports car maker Porsche AG for 3.9 billion euros ($5.8 billion) in Dec. 2009. Volkswagen valued Porsche AG and Porsche Holding, Europe's largest car dealership group, at a combined total of 16 billion euros in equity and debt.

-- On Nov. 24, 2009, VW entered into an agreement with Porsche that grants Porsche Holding Salzburg the right to sell the operating trading business to VW by Dec. 31, 2013.


-- The Porsche and Piech families will sell their automobile dealership business -- Europe's largest, with annual unit sales of 474,000 vehicles -- to VW starting in 2011. The business was assigned an enterprise value of 3.55 billion euros.


-- In March 2010, Volkswagen launched its announced capital increase, issuing up to 65 million preferred shares to finance its merger with Porsche, and will raise net proceeds of about 4.1 billion euros ($5.46 billion).


-- Porsche SE will issue new voting and preference shares, probably in the first half of 2011. It gave no details, but sources close to the situation have said its owner families aim to raise about 5 billion euros.


-- VW's home state will maintain the right to veto strategic issues and to name two VW supervisory board members. This will be anchored in VW's articles of association.


-- With regard to the creation of an integrated automotive group with Volkswagen, the fiscal year of Porsche, which currently runs from Aug. 1 to July 31 of the following year, should be changed to run concurrently with the calendar year effective January 1, 2011. An abbreviated fiscal year will be created for the period from Aug. 1, 2010 to December 31, 2010.


-- The exact merger terms are to be set in time for a deal to conclude in 2011. The extended Porsche and Piech clan will remain the largest shareholders with a stake of 35 percent to 40 percent, followed by Lower Saxony. The Gulf state of Qatar is in advanced talks that could make it the third-largest shareholder in VW.

-- The combined company will have 10 brands, adding the Porsche marque to a stable that already includes Audi, Bentley, Bugatti, Skoda, Seat and Lamborghini.

-- Porsche's creditor banks and regulatory authorities have to approve the merger.

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