Porsche – what’s it worth?
In 2008 Interbrand, a global brand management consultancy, valued the combined VW, AUDI and Porsche brands at €12.1BN. It seems cautious as their combined market capitalisation, value of the shares at today’s price (August 2009), is €55.2BN.
But to create this combined group, VW first have to pay an agreed €3.3BN for 42% of the Sports Car business. That values the entire Porsche sports car business at around €8N. Its current market capitalization is €4.9BN, so there’s a hefty premium.
It was Benjamin Franklin who said, “I conceive that the great part of the miseries of mankind are brought upon them by false estimates they have made of the value of things.” So, the nagging question is why VW would want to pay any kind of premium for the Porsche business at all. After all, they provide the lion’s share of its earnings in any event, due to the pricing of the Cayenne. So why pay twice?
What else does Porsche have apart from its undoubtedly attractive brand? A small assembly plant at Zuffenhausen, Stuttgart, capable of building 911s and engines, a screwdriver plant at Leipzig that fits petrol engines to the Cayenne, a distribution network (which will be sold separately to reduce debt) and an engineering consultancy.
That’s not how VW see it. They expect the merger with Porsche to boost earnings by at least €0.7BN a year as a result of synergies generated by the fusion deal. Capitalising that at their estimated cost of capital – 14% – could be worth €5.0BN, meaning that, along with the profits boost, the deal should pay off in 5 years or so. It’s not bad for Ferdinand Piëch individually either. He owns 13% of Porsche, so stands to make a around €0.4BN.
In any event, Porsche is a moving target. In August 2009 it concluded negotiations with the Qatar Investment Agency (QIA) for QIA to buy 17% of the combined VW-Porsche firm , The Qatari sovereign wealth fund, paid €7.0BN for its stake in the voting shares of Porsche SE, valuing it at €41.2BN. If a premium for control were added, a total valuation of €50BN to €55BN seems realistic. The QIA buy their shares from Porsche and Piëch family members, so reducing their stake.
However, valuing corporations is not a precise science. Investors have different expectations about returns and analysts have varied forecasts of the future.
Conventional large company valuation is based on discounted cash flow methodology, so there are two tasks: estimate the cash flow and estimate the discount rate. (For details on assumptions see the ‘Model Methodology’ below.)
If you assume that the Porsche sports car business is stable and will grow at a steady rate, my model gives a value for the equity of between €7.3BN and €9.8BN. So, including a premium for control, a figure of €12BN seems reasonable. €8BN now sounds like a very good price indeed.
And Porsche car sales have also grown swiftly in recent years, due to the Cayenne. It hopes for a similar result from the ‘Panamera’. An alternative valuation, including an initial two-year period of fast growth, would see the firm’s value rising to €20.8BN, taking into account its potential earnings over the next ten years. Now its beginning to look as if their getting it on the cheap!
Porsche has shown that it can operate successfully as a ‘hedge fund with a showroom’, so its income from financial dealings are included in my valuations. Ferdinand Piëch, head of VW, has made it clear that he wants to run an auto maker, not a bank. However, the rest of the shareholders may be more difficult to persuade. Certainly, if profits from financial operations are excluded, the value of Porsche diminishes substantially. On the other hand, transferring the Porsche financial operation into a larger group, could accelerate profits.
Is everyone a winner?
Porsche emerges debt free by 2011. VW will have paid €8N or so for the business in total and the families will also have sold their car trading business to VW, valued currently at €3.55N.
On the other hand they remain the dominant shareholder in the enlarged group. While the final structure is unclear they will hold at least 35% of a business worth at least €50N, rather than total control of a business worth €10N. Not bad.
VW is an enlarged group with potential to leverage yet another brand and has a stable shareholder base: the family, Qatar ( another family) and Lower Saxony.
The only real losers I can see are the preference share holders. To finance the purchase, Volkswagen plans a capital increase of preference shares in the first half of 2010 to finance the purchase. That will lead to a large dilution in share value. Porsche too aims to raise capital by issuing new ordinary and preferred shares, probably in the first half of 2011. It will have a similar effect.
The ’free cash flow’ – the flow of earnings after tax after paying for capital expenditure, additions to working capital and adding back depreciation – is available from the financial accounts. In the last five years Porsche re-invested almost 90% of its Profit After Tax (PAT). This should diminish substantially in the future.
The discount rate is based on a series of estimates to identify the ‘cost of capital’ using the CAPM approach. In the case of Porsche, their cost of borrowings is available from their accounts. The cost of equity capital was estimated from the rate for Bundesbank bonds plus a risk premium based on the average return on capital of comparable German automakers – VW, MAN, BMW and Daimler.
Two other factors needed for the CAPM are the Share Price Beta – taken from the Xetra in August – and a growth factor based on the long term growth rate of the German GDP.