Volkswagen Doubles as Porsche Move Cuts Free Float (Update2)

By Alexis Xydias and Andreas Cremer
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Oct. 27 (Bloomberg) — Volkswagen AG more than doubled in Frankfurt trading as Porsche SE’s plan to achieve a 75 percent stake in the carmaker prompted short-sellers to purchase from a shrinking pool of stock to close their positions.

Volkswagen jumped 309.15 euros, or 147 percent, to 520 euros. The stock has more than tripled this year, valuing the Wolfsburg, Germany-based company at 145 billion euros ($181.9 billion). Investors including hedge funds may hold 8.67 billion euros in borrowed stock that they must buy and return, according to Bloomberg calculations based on estimates by London-based research firm Data Explorers.

Porsche, maker of the 911 sports car, said yesterday that it has raised its stake to 42.6 percent of Volkswagen’s ordinary stock from 35 percent, and that it holds options for another 31.5 percent. Porsche said the disclosure was aimed at giving short- sellers a chance to close positions “unhurriedly” following stock moves of the past two months. The German state of Lower Saxony owns 20.1 percent of Volkswagen’s common shares.

“This is panic buying, and the low free float complicates things,” said Jens Schattner, an analyst at Sal. Oppenheim in Frankfurt who upgraded Volkswagen’s common shares to “neutral” from “reduce” today. “We know nothing or very little about Porsche’s investment. Until all these short positions are closed, we’ll see Volkswagen shares rise.”

12.9% On Loan

About 12.9 percent of Volkswagen’s common stock, or 37.9 million shares, was on loan as of Oct. 23, mostly for short sales, according to Data Explorers, which surveys lenders and clearing agencies. That’s the highest proportion for any company on Germany’s 30-member benchmark DAX Index. The Oct. 23 closing price for Volkswagen, Europe’s biggest carmaker, would have given the short positions a value of 8.67 billion euros.

Until today’s price shift, Volkswagen’s biggest gain in almost two decades was a 27 percent increase on Sept. 18. People familiar with securities lending said at the time that the collapse of Lehman Brothers Holdings Inc. caused the jump by triggering recalls of borrowings. The stock fell 23 percent on Oct. 20, the biggest drop also in almost two decades, as short- sellers foresaw the price declining once Porsche gains control.

There may be almost no ordinary stock freely traded in Volkswagen because most is now in the hands of Porsche, Lower Saxony and the banks that underwrote Porsche’s options, Adam Jonas, a London-based analyst at Morgan Stanley, wrote in a research report today.

Index-tracking funds also hold stakes in Volkswagen, the DAX’s most-weighted stock, and must retain the holdings as long as the carmaker remains a member. That would leave short-sellers with no supply to buy back and close their trades. Short sales have largely been undertaken by investors betting on a decline in the common stock or its underperformance relative to the preferred shares, analysts have said.

`Narrow’ Market

“Those who believed that the share price would drop when we passed the threshold of 50 percent should be aware of the narrowness of the market,” said Frank Gaube, head of investor relations at Porsche’s Stuttgart, Germany, headquarters. “We would expect our counterparties in the options agreement to be covered” with their own earlier purchases of Volkswagen stock.

Michael Brendel, a spokesman for Volkswagen in Wolfsburg, declined to confirm the current free float and reiterated Volkswagen’s comment of recent months that it “appreciates” Porsche’s interest.

Porsche has said until now that it was seeking only a majority stake in Volkswagen, with a larger holding unlikely because of financial-market volatility. It reiterated yesterday that it aims to own more than 50 percent by the end of this year.

When exercising the options, the underlying Volkswagen shares will be bought at the market price, Porsche said in the announcement. Porsche will receive the difference between the market price and the option strike price, the company said.

Gaube declined today to say how much Porsche had paid for the options, what strike price they have or which banks underwrote the contracts. Porsche hasn’t lent Volkswagen shares on the market, Gaube said.

`Sell’ Recommendations

Short-sellers borrow stock on expectations they can repurchase the shares later at a lower price. Of 39 analysts covering Volkswagen, 32 have “sell” recommendations on the stock and only one advises buying.

“Those still short on Volkswagen shares might have to finally cover their positions,” said Christian Falkner, a trader at Alpha Wertpapierhandel in Frankfurt. “The reaction for Porsche is largely dependent on the strike price their option position has.”

Hedge-fund traders have wagered that the difference between Volkswagen’s common shares, which carry voting rights, and its preferred shares, which don’t, will narrow in favor of the latter. The common shares, which outnumber the preferred equity almost three to one, are the only gainers this year on either the DAX or the nine-member Bloomberg Europe Autos Index. In contrast, Volkswagen’s preferred stock has dropped 62 percent, including a 14 percent decline today, to 37.89 euros.

“The situation remains highly fluid and opaque,” Morgan Stanley’s Jonas said in the report. “We advise investors to apply a very high-risk premium to any trade involving VW or Porsche securities.”

Porsche fell 4.18 euros, or 9.1 percent, to 41.85 euros. The stock has dropped 69 percent this year.

To contact the reporter on this story: Alexis Xydias in London at; Andreas Cremer in Berlin at
Last Updated: October 27, 2008 13:41 EDT