June 24, 2021

Gp Delivers1

The excellent automotive artisans1

VW’s potential Porsche listing signals auto upheaval just starting

Volkswagen Group’s potential listing of Porsche would be a strategic watershed moment and show the unprecedented upheaval of the auto industry may only just be beginning.

The German industrial giant and other incumbents have navigated a global pandemic far better than initially feared, posting robust profits and ample amounts of cash flow. Even still, their valuations are stubbornly low compared to Tesla.

No automotive CEO has lamented this as openly and frequently as Herbert Diess, who routinely makes headlines by emphasizing the urgency with which VW must move to transform itself. Exploring a Porsche listing is a nod to that need and will be a litmus test of sorts for its future.

“There’s a loss of power due to the low valuation, which Diess has complained about in the past, and that’s a significant disadvantage,” said Bankhaus Metzler analyst Juergen Pieper. “An IPO of Porsche would be the silver bullet.”

Porsche’s appeal is obvious to investors. Bloomberg Intelligence analyst Michael Dean estimates the brand could stand up a 110 billion-euro ($133 billion) valuation in an initial public offering, roughly 20 billion euros more than investors value VW at now.

But getting such a deal done will not be simple because of the institutional hurdles that have stood in the way of other attempts Diess, 62, has made to shake up VW since he became CEO in 2018.

Major decisions must be approved by the company’s dominant and often at odds shareholders led by the Porsche and Piech family and German state of Lower Saxony, which tends to side with powerful labor unions.

What Tesla’s meteoric rise has done, however, is send a clear signal to Diess that extreme measures must be taken to get the capital markets to come around to “old-auto” companies. VW’s review of options for Porsche comes after Daimler decided to spin off its truck unit after years of management opposition to such a move. Its shares have advanced 13 percent since then and are hovering around a three-year high.

Even after the spinoff boost, Daimler is worth about $86 billion, almost matching the valuation of NIO, which brought in roughly one-tenth the revenue last year.

Investors have taken a dim view of automakers’ ability to keep up with new entrants unencumbered by sprawling production networks centered around combustion engines. Ford put this reality in stark relief this week when it announced plans to go from selling zero electric vehicles last year in Europe to only offering full-electric passenger cars by the end of the decade.

It’s clear VW will spare no expense in its efforts to catch up to Tesla, having budgeted a bigger slice of its 150 billion-euro spending budget for investment in electric cars and software in the next five years. As strong as earnings are now, they will be strained by all the costs associated with retiring some operations.

“VW’s balance sheet may not be fit to ensure both accelerated investments in electric and autonomous vehicles and finance an accelerated downsizing of legacy issues,” Jefferies analyst Philippe Houchois said in a note.