Volkswagen financial headroom alleviates need for immediate disposals – bankers
* Scale of liability may substantially increase
* Non-core asset sales could protect from medium-term downgrade
* Power engineering business, PGA Motors among potential disposal candidates
Volkswagen [ETR:VOW3] has enough balance sheet flexibility to alleviate the need for any immediate disposals in the aftermath of the emissions scandal in the US, said several sector bankers.
The German automaker has sufficient headroom to shield itself from the impact of fines and liabilities in the near term, the bankers said.
Volkswagen has so far set aside EUR 6.5bn to cover the cost of the fault identified, but this provision only covers product recalls in the US.
US sales represent less than 5% of the 11m diesel cars sold globally by Volkswagen that contain the device used to cheat emissions tests, a US-based banker said. The US’s Environmental Protection Agency could fine the company up to USD 18bn, and other liabilities in the US and other countries could follow.
Volkswagen had EUR 17.5bn in cash and equivalents and EUR 15bn of securities, as of 30 June. It also has EUR 56bn of undrawn medium term notes among other undrawn lending reserve. Together with a net debt/EBITDA ratio of 4.3x, which is in line with industry peers, it has room to borrow, if required.
Volkswagen’s credit rating has been put on negative watch by S&P, Fitch and Moody’s, due to the emissions crisis. Although the agencies believe that the company metrics could absorb the immediate impact of the emissions scandal, they have concerns that Volkswagen’s brand image and reputation could be undermined, potentially affecting its revenues and EBITDA.
Since news of the emissions scandal broke, Volkswagen shares have fallen from EUR 162.4 to around EUR 99.92 by midday trading on Monday, valuing the automaker at EUR 49.8bn. On Friday Volkswagen appointed Porsche's head, Matthias Müller, as CEO to replace Martin Winterkorn, who resigned after the crisis emerged. On Friday, Germany’s transport minister said that cars produced in the country may contain the same problem as in the US.
Volkswagen declined to comment for this story.
Volkswagen’s future would be less predictable if its liabilities become much bigger. The size and scope of the impacts it might face are difficult to predict, three bankers said. If the cost of covering the liability reaches unexpected levels, the company may turn to the sale of non-core assets as a way to avoid being downgraded by credit rating agencies, a Germany-based banker said.
Other than the long-mooted listing of its Trucks & Buses business, Volkswagen’s power engineering business, a division in MAN SE that manufactures large-bore diesel engines for marine and stationary applications, could be sold, the Germany-based banker said. The business reported sales of EUR 3.7bn and EUR 278m in operating profits in 2014. The likes of UK-based Rolls-Royce [LON:RR] and Japan-based Mistui [TYO:8031], as well as private equity firms, would be likely bidders, the banker said.
Another candidate is PGA Motors, a car dealership business with operations in France, the Netherlands, Belgium and China that sells multi-brands, the banker said. The business is owned by Porsche Holding Salzburg, a subsidiary of Volkswagen.
The cash raised by the disposal of any of these businesses would be north of EUR 1bn, the banker said. But the expectations over the size of Volkswagen’s liabilities should be put in perspective and compared to other cases in the industry, a second US-based banker said. General Motors' [NYSE:GM] problems with a faulty ignition switch, which led to the deaths of 124 people, has cost it a criminal penalty of USD 900m and around USD 600m more for settling lawsuits, besides an estimated USD 4.1bn in recall costs.
Volkswagen's cheating on emissions testing has not been directly responsible for the killing of people and therefore should be settled for less than the GM case, the banker said. And the impact on Volkswagen’s credibility with consumers should be smaller than what GM suffered, this banker added.
Politically, the US government is unlikely to push for anything that could bankrupt a company from its strongest NATO ally, the banker said. The German government would not let it happen either, so fines in the US should end up being established at a value that Volkswagen will be able to manage, the banker added.
The impacts of the scandal should also have limited implications on bigger M&A moves, such a potential deal with rival Fiat-Chrysler [BIT:F], four bankers said. Fiat-Chrysler’s Chief Executive, Sergio Marchionne, has been pushing for consolidation in the sector, with GM as his preferred target. His preference should not change due to the current situation, although if Volkswagen is to incur a significant drop in sales in the next two years, it could become a target of a hostile offer from Marchionne, a second Germany-based banker said.