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How to ride on a Porsche IPO

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Porsche

POAHY -0.65%

was more lucrative than ever in the first quarter. Investors will have to wait until the fall for its initial public offering, but there are indirect ways to get ahead of schedule.

Volkswagen,

OATH -0.68%

which has controlled the sports car brand since 2012, reported full quarterly results on Wednesday. Previously published last month’s headline numbers were increased due to large hedging returns. Nickel’s Wild Journey on the London Metal Exchange was probably the dominant driver given VW’s investment in supply chains for electric vehicles, but CFO Arno Antlitz declined to give details of Wednesday’s media call “for reasons of competition”.

A detailed report on Wednesday included a breakdown of Volkswagen’s operating profit by brand, including an operating margin for Porsche of 18.6% that had nothing to do with hedging. If this figure is maintained, it will be the most profitable year for the brand since its takeover in 2012. However, the stability of Porsche’s profitability over the last decade, even if revenues have more than doubled, is a real attraction for investors. The lowest margin annually was 15.4% in 2020, affected by the pandemic.

That record puts Porsche ahead of its German premium counterparts, but not at the Ferrari level, where Wednesday’s operating margin in the first quarter was nearly 26%. Whether investors perceive Porsche as another German carmaker or as a unique elite brand like Ferrari, will be of great value in its valuation.

Mercedes-Benz

and

BMW

shares traded 5.5 times ahead, compared to nearly 40 in the Italian sports car maker.

Assuming Porsche shares trade at a very rough average between the two extremes, its market value could be around € 80 billion, equivalent to around $ 84 billion, based on brokerage estimates.

Cowen.

The market value of Volkswagen itself is only 92 billion euros. The comparison highlights the value that can be gained for investors through a minority IPO, which the company continues to plan for in the fourth quarter. Unfortunately, the proposed deal is structured in a way that will not give VW investors something like full access to income. Instead, they will receive special dividends equivalent to about half of the proceeds from the sale of VW’s 25% stake in Porsche – a total of just over $ 10 billion when the subsidiary is valued at $ 84 billion.

The good news is that these special dividends don’t seem to be included in the more widely traded so-called VW preferred shares, which are at a 12-year low 4.6 times the expected return. As the IPO approaches there is room for hope. VW’s “ordinary” shares, which are mostly held as shareholders but are also tracked by a US depository receipt popular with individual US investors, remain overestimated compared to the historical level and preferred stock. Both instruments will receive special dividends.

VW’s own controlling shareholder, which is confusedly called Porsche SE, offers an alternative way to close the deal. This investment vehicle, which is on the list, led by VW Chairman Hans Dieter Petsch, will play a special role in the proposed IPO, buying from VW a piece of voting shares of Porsche with a premium of 7.5% – much lower than the 38% premium at which vote VW shares. trade. Regardless of the tricky details, it is safe to assume that Porsche SE will eventually win in a complex deal with the company it controls.

The essence of Porsche’s IPO is that the discount of the VW conglomerate, which can be partially deployed, is really very big. Even with an approach that is far from ideal, outside investors should end up getting some benefits.

Write Stephen Wilmot on stephen.wilmot@wsj.com

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