Merger Market
* Share issue at current price too dilutive
* Uncertainty around total required to address issue would cloud any cap raise
* German central government may provide credit line if necessary
A capital raise would likely be low on Volkswagen’s [ETR:VOW] list of options as it attempts to address the high cost of the fallout from its emissions scandal, sector bankers, a credit analyst and an industry consultant said.
Before considering a capital raise, the company would likely look at options including cutting its dividend either partially or completely, reducing capital expenditure or selling businesses and assets, they said.
Volkswagen today, Tuesday, announced strategic decisions including a EUR 1bn cut in planned annual investments and measures to reduce fixed costs.
The company declined to comment in detail for this article, but a spokesperson said: “We have a regular plan for financing that guides us.“
In the 12 months to 30 June 2015, VW paid out EUR 2.5bn in dividends and spent EUR 13bn on capital expenditure investments in property, plant and equipment and intangible assets, according to company reports.
Last year, Volkswagen said it would invest EUR 64.3bn in the Automotive Division for the period from 2014 to 2018.
A capital raise is not seen as a priority option in part because the market for Volkswagen-issued equity and debt is depressed given the company’s struggles, the consultant said.
Ordinary shares in VW are currently trading at EUR 128.50 compared to EUR 161.55 on 18 September before news of the issue broke.
At the current share price, a capital raise is far too dilutive. Unless the company was planning such a measure prior to the scandal, it probably would not attempt one now, the first banker said.
Uncertainty surrounding the full cost generated by the crisis - in terms of legal liability, compensation for customers and loss in sales - would also weigh on investor decisions to participate in any form of capital raise, the bankers and consultant said.
While sovereign wealth funds and existing VW investors might support a cash call in principle, the fact that they do not yet know the scale of the eventual costs would discourage them from doing so at this stage, the first banker said.
The decision on which combination of measures to take would not be made until more information on the costs is certain, two bankers and the consultant said.
VW could attempt to raise a few billion euros via an offering of non-voting preference shares only, leaving major ordinary shareholders – Porsche Automobil Holding, Qatar Holdings and the State of Lower Saxony - with unchanged voting rights but a slightly more diluted proportion of dividends, the second banker said.
VW has permissions in place to issue up to 32.42m preference or ordinary shares. At today's preference share price of EUR 128.49, VW could hypothetically raise EUR 4.166bn before fees. But if a larger amount is needed, the ordinary shareholders’ consent and participation would likely be required so that their dividend proportion is not further diluted, this banker added.
One of the ordinary shareholders in particular, the State of Lower Saxony which holds 12.4% of shares and 20% of voting rights, would prove difficult to persuade to participate, the second banker said.
The State would have a hard time convincing taxpayers that their money should go towards fixing VW’s mistakes, he said.
However, the German federal government could play a role in financing VW’s recovery by providing a credit line, the first banker said.
VW’s importance to the economy and its role as a large employer in Germany means it is likely to get access to some government assistance if it is needed, but only after paying penance for the scandal.
That process has already started with the CEO being replaced, the establishment of internal and external investigations, and company cooperation with criminal proceedings, the first banker said.
The US government’s provision of financing to General Motors [NYSE:GM] had worked out relatively well, he observed, although GM was first left to file for bankruptcy protection.