Cablegate: Porsche Steps Up Vw Takeover Effort

DE RUEHFT #2654/01 2380943
O 250943Z AUG 08




E.O. 12958: N/A
SUBJECT: Porsche Steps up VW Takeover Effort

REF: Frankfurt 1515

1. SUMMARY: Porsche, Germany's smallest automobile maker, has
received permission from the EU to pursue a takeover of Volkswagen
and has stepped up its efforts to acquire a majority stake in the
company. Major hurdles remain, such as how to divide power in the
supervisory board of a merged entity as well as state and federal
government resistance to the move. Porsche will continue to pursue
the takeover aggressively, as it offers a way for it to comply with
EU CO2 emissions standards while also becoming a much larger player
in the industry. END SUMMARY.

EU Gives Green Light

2. On July 23, the EU Commission approved Porsche's proposed
attempt to take over Volkswagen (VW) saying that a merger would not
hinder competition in the industry and related sectors.
Family-owned Porsche, which currently owns 35.6% of VW stock, is
looking to increase its holding to a controlling 51% stake.
Regulators in the U.S., China and Russia have already given approval
for a takeover as it relates to the interests of the two companies
in those countries.

3. If the plan goes forward, the newly-created Porsche Holding
Societas Europaea (SE) would become a new automobile giant in
Europe. The company would also be at less risk of a hostile
takeover, which many feared would happen to VW in 2005 when its
share price tumbled. With profits currently dipping in the German
automobile sector, companies such as VW and Daimler, which have no
majority owner, remain at risk to such a move. A merger would also
help Porsche comply with the EU directive to lower CO2 emissions to
120g per kilometer by 2012. Porsche's high-powered fleet presently
produces 297g of CO2 per kilometer, the highest emission rate
worldwide (see reftel). The average emission of a combined fleet
would be significantly lower, giving Porsche a way around making
drastic changes to its cars or paying large fines.

But Obstacles Remain

4. The takeover attempt gained momentum when the EU struck down
Germany's so-named "VW law" in late 2007 arguing that it violated
the free flow of capital. The law, created in 1960, gave the State
of Lower Saxony a 20% blocking stake in VW, enabling it to prevent
moves such as takeovers. A new version of the law, which attempts
to comply with EU standards while also preserving Lower Saxony's
blocking privilege, was passed by the German federal parliament
(Bundestag) in May 2008. The EU Commission is presently reviewing
the new law and many experts think it will also be struck down.
Nevertheless, a merger can not be finalized until the commission

5. The distribution of works council seats on the supervisory board
of the new holding company has also turned into an obstacle in the
negotiations. Like other large Germany-based companies, VW and
Porsche follow the co-determination model where a works council
represents employees on the supervisory board. The current plan
gives three seats to workers of each branch. Bernd Osterloh, chief
of the VW Works Council, argues that with VW's 324,000 employees its
workers deserve greater representation than Porsche's 12,000.
Osterloh filed an interim injunction and other charges, which
Ludwisgburg and Stuttgart Labor Courts rejected in November 2007 and
April 2008 respectively. The VW Works Council appealed August 13
and a ruling is expected by the end of the year, but further appeals
are possible which could further postpone a takeover. Osterloh has
refused to attend a "peace summit" planned by the Metal Union IG
Metal on co-determination unless the Porsche and VW Supervisory
Board Chairmen also attend. The current ten-year agreement between
Porsche and its works council cannot be terminated without agreement
from the works council. Industry experts see in Osterloh's effort a
fear of the changes Porsche would bring to the work culture at VW,
including longer working hours, lower wages and a greater focus on
profits, although Porsche has not explicitly said it would take such

A Family Reunion of Sorts

6. Despite the differences in size, ownership structure and
business model, VW and Porsche have intertwined histories that make
a merger more likely. After founding Porsche in 1931, Ferdinand
Porsche served as CEO of the newly founded VW in the 1930s and 1940s
and designed the Beetle. He returned to Porsche after the war.
Ferdinand Piech, one of his grandsons and one-time VW CEO, is
currently Supervisory Board Chairman at Volkswagen. The two
branches of the Porsche family, Porsche and Piech, jointly run
Porsche. Long before the planned takeover, both companies had

FRANKFURT 00002654 002 OF 002

shared research and development projects and suppliers. The Porsche
Cayenne, VW Touareg and Audi Q7 are built on the same platform.

7. Porsche began increasing its 20% ownership of VW in 2005 to its
current level. The move was initially seen as beneficial to
Volkswagen in preventing a hostile takeover, but has also been
criticized as a "creeping takeover" by a well-capitalized
privately-owned company of a publicly-listed competitor exposed to
the vicissitudes of the equities market. While Porsche produces far
fewer cars than VW (96,794 to 5.2 million), its profit of 4.24
billion euros ($6.19 billion) in 2007 is slightly greater than VW's
4.12 billion ($6.01 billion).

8. COMMENT: Merging Porsche and VW would create the second largest
automotive company worldwide that would also be able to comply with
EU CO2 emissions standards. Possible factors that could derail the
attempt include an economic downturn in Germany that hit automobile
firms' profit margins and political maneuvering at the state or
federal level against the move. While the way forward for a
takeover is not yet completely clear, few of these barriers appear
insurmountable in the long term. END COMMENT.

9. This cable was coordinated with Embassy Berlin and ConGen

© Scoop Media

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