On Feb. 24, 2022, global carmaker Volkswagen AG (VW; BBB+/Stable/A-2) announced its intention to explore a potential partial IPO of its luxury car brand Porsche AG, which could occur before the end of 2022.

The plan foresees splitting the share capital of Dr. Ing. h.c. F. Porsche AG (Porsche), which is the parent of the Porsche brand's operations, into 50% of nonvoting preference shares and 50% of voting ordinary shares. Porsche Automobil Holding SE (PSE), which is fully controlled by the Porsche and Piech families and currently holds 31.4% of the share capital and 53.3% of voting rights in VW AG, would build up a direct ownership position in Porsche by acquiring a 25% plus one share of Porsche's voting common shares. Up to 25% of the preference shares would be listed.

We have received questions from investors regarding how we evaluate the planned transaction from a governance perspective and how potential future debt at PSE could influence our view of VW's credit metrics. PSE had no financial debt at the end of 2021, but we believe it may fund the acquisition of the 25% plus one share in Porsche at least partially with debt, noting that PSE has not made any statements in this regard.

Frequently Asked Questions

How does the transaction affect S&P Global Ratings' view of governance in the VW group?

We anticipate that the planned transaction would incrementally dilute our view of the business and likely increase governance complexity. Hence, we see it as credit negative from the perspective of creditors of the Volkswagen AG group (see "Carmaker Volkswagen AG's Potential Listing Of Porsche Is Credit Negative," published March 3, 2022). This is foremost because of VW's reduced ownership in one of its most profitable brands (contributing 18% of revenue but 38% of the operating result of VW's automotive division in 2021), and also due to the intended payout to shareholders of about half of the IPO proceeds.

We think the transaction underscores the specificity of VW's decision-making and control structures, which are centered on a limited set of principal stakeholders. We believe this can adversely affect the interests of creditors and other investors. PSE exerts material influence on VW thanks to its majority voting rights in Volkswagen AG, yet it does not possess a majority on Volkswagen AG's 20-member supervisory board. This is because the German State of Lower Saxony is entitled to appoint two supervisory board members as long as it owns at least 15% of VW's common shares (currently representing 11.8% of total subscribed capital and 20% voting rights; see chart), and 10 members of the supervisory board comprise workers' representatives under German law. The State of Qatar appoints two seats and six other members of VW's supervisory board are appointed by or affiliated with PSE, including the chairman. PSE representatives also chair each of all the board committees.

Chart 1

In our view, this structure is weaker than the structures of peers in the sector and reduces board effectiveness, as it means that major decisions often focus on balancing the interests of the key voting parties: particularly PSE, workers' representatives, and the State of Lower Saxony. The latter two groups often have common interests because both are naturally concerned with employment, pay, and regional investment. The focus on these three stakeholders may reduce the consideration for creditors' interests in the decision-making process, as is illustrated by the proposed credit-negative minority IPO. In our view, the main impact of the deal on the aforementioned key stakeholders is greater direct influence of PSE on Porsche, the respective participation of the owners in the special dividend that could total €7 billion-€13 billion as per our estimates, and the payment of a special bonus to certain employee groups of VW in Germany (€2,000 each for about 130,000 employees). The company may use the share of retained proceeds for investments that could partly offset the dilution of our view of the business over time.

We are also mindful of potential conflicts of interest for PSE in its roles as VW shareholder and prospective direct shareholder of Porsche. As the former, it supports the stated objective of maximizing value for VW, whereas it would benefit from a lower valuation in its role as acquirer of Porsche. Through its role on VW's supervisory board, it also co-decides the terms of the IPO, such as the decision on the 7.5% premium for Porsche's voting shares over the nonvoting shares. PSE's direct influence at the Porsche level could create further complexity for future strategic and operational decision-making, for example if diverging priorities emerge on capital allocation decisions linked to the technological transformation of the group. The so-called blocking majority of 25% plus one share (voting common shares) in Porsche would give PSE veto rights over a finite set of key motions, which according to German law include decisions such as capital increases or changes to profit and loss sharing agreements.

We also note that, apart from creditors, other equity investors have a minor influence on decisions in the VW group because the free float in the voting common shares is below 10%, and there are no independent supervisory board members who are not affiliated with the key voting shareholders. The group's non-voting preference shares that make up about 40% of total equity are the main means to invest in the group, and the proposed Porsche IPO replicates a similar structure.

Could the planned IPO make PSE the parent entity of the rated VW group?

Based on what we know today and our expectation for the size of possible indebtedness at PSE, which is currently debt-free, we do not consider PSE to be the parent of the VW group. We estimate that if PSE were to fund the purchase of its 25% direct stake in Porsche's common shares with its share in VW's special IPO dividend and the rest with debt, this would require PSE to raise €5 billion-€11 billion of debt, equivalent to about 0.2x-0.4x of VW's 2021 adjusted EBITDA. Given VW's increasingly strong credit metrics, with adjusted debt to EBITDA well below 1.0x in 2021 (pending final adjustments), this is unlikely to change our assessment of VW's financial risk at this stage. We note that PSE has not given any indications how it might fund the deal.

Moreover, we think that PSE exerts significant influence over VW AG, but that the extent of its control is reduced by the aforementioned presence of other shareholders and the composition of VW's supervisory board. We note that this also why PSE does not consolidate VW AG in its reporting (bearing in mind that auditors' opinions are not binding on us when we define a group for our rating assessment). Apart from VW, PSE holds other investments in the automotive and adjacent sectors, but these are very minor in terms of assets, liabilities, and earnings.

Based on these considerations, we believe that Volkswagen AG and its subsidiaries remain the pivotal driver of the overall creditworthiness of the group.

Would you adjust VW's credit metrics for debt at PSE?

Yes. Although Volkswagen AG will remain the main driver of the group's creditworthiness, PSE would rely on dividends by VW or Porsche to service its debt, absent other material sources of earnings and cash flows. At the same time, we will not apply proportionate consolidation in VW's adjusted financials for the reduced stake in Porsche. Based on our expectations for robust credit metrics at VW and our estimated maximum initial impact below 0.5x of VW's adjusted EBITDA, the adjustment for debt at PSE would not materially shrink VW's rating headroom at this stage. We also note that the share of proceeds that is retained would reduce our adjusted debt at VW as long as it remains unspent and is available for debt repayment, partly offsetting the adjustment for debt at PSE. In our adjustments, we would not take into account the value of PSE's stakes in VW and Porsche, as we perceive those as strategic rather than financial investments for PSE and we doubt that PSE would be willing to monetize these assets to repay debt. We would net from debt any cash at PSE that we consider freely accessible and available for debt repayment.

Related Research

• Carmaker Volkswagen AG's Potential Listing Of Porsche Is Credit Negative, March 3, 2022
• Volkswagen AG, Feb. 2, 2022