Porsche, the sports car manufacturer’s initial public offering held towards the end of September 2022, was Europe’s largest initial public offering in over a decade, Moneyweb reports.
The much-anticipated IPO saw the company’s shares trading at prices marginally lower than the issue price. The company’s shares traded at EUR 81 per share which was down 1.8% and in line with a drop in the Euro Stoxx 50 Index. It is reported that Porsche debuted at EUR 82.50.
It is reported that this price was higher than what Volkswagen, Porsche’s parent company was looking to raise. This indicated that the IPO was most like over subscribed with investors happy to pay premium prices for the opportunity to hold stock in the iconic sports car company.
- Porsche’s IPO was oversubscribed. The banks retained by Volkswagen to handle the offering had to ration and allot shares to retail investors.
- Porsche’s IPO raised an estimated EUR 9 billion or US$ 9.18 billion for Volkswagen, which has decided to not only list the unit on the Frankfurt Stock Exchange but make the company fully autonomous by dismantling domination and profit and loss agreements.
- Porsche is now free to chart its own direction in terms of strategy and can fully account for the profits on its books.
The IPO raised EUR 9.4 billion or US$ 9.2 billion in cash for Volkswagen which went ahead with the offering despite conditions not being conducive for capital raising through an equity offering and more so an initial public offering. The market was not conducive due to the energy squeeze in Europe as well as increasing interest rates. The success of Porsche’s IPO shows the resilience of a business that produces high-end and top-quality products. The IPO valued Porsche at EUR 78 billion or US$ 76 billion.
Volkswagen placed 113,875,000 preferred non-voting shares with no par value in Porsche AG in the IPO. According to Porsche’s website, “The Preferred Shares placed represent 12.5 per cent of Porsche AG’s issued and outstanding share capital. Trading of the Preferred Shares on the Regulated Market of the Frankfurt Stock Exchange (Prime Standard) will take place under the trading symbol “P911”, the German Securities Code (WKN) “PAG911” and the ISIN “DE000PAG9113”.”
According to the Porsche newsroom, the rationale for the IPO was the need for entrepreneurial freedom for Porsche from its former parent Volkswagen. The two companies had a domination agreement which is set to expire at the end of 2022. Additionally, the companies had a profit and loss transfer agreement. A domination agreement is defined as an agreement whereby one of the parties has unconditional authority to instruct the managing body of the other party which is an equity company; without there being any direct or indirect participation relationship between said parties.
In this context, Volkswagen had the said unconditional authority to exert its management and strategic influence on Porsche without there being any direct participation in the relationship. Alternatively, A domination agreement is an agreement in which one company like Porsche AG submits itself legally to the direction of another Volkswagen. In consequence, Volkswagen would be authorized to issue binding directives and thus control the management of Porsche.
A profit and loss transfer agreement is an agreement in which a company transfers its entire profits to another company; in consequence, Volkswagen would be entitled to receive the entire profits of Porsche. At the same time, Volkswagen would be liable for potential losses made by Porsche. Observed through this lens, it is not hard to see that the IPO for Porsche was about more than just raising money for its parent.
- An IPO or initial public offering is when a company looking to either raise capital or provide an exit strategy for its original investors decides to sell its shares to the public. Porsche’s IPO was held on the 29th of September 2022.
- The IPO was oversubscribed, which means that there were more buyers for Porsche’s shares than there were shares resulting in the book-running banks rationing the offering, especially in the retail investor segment.
- Porsche’s IPO reflects the perfect timing and prescience of Volkswagen’s management team when it comes to corporate financial strategy. The management teams of both auto makers successfully floated the shares of Porsche despite the prevailing market environment which does not support any form of equity offerings.
Through the initial public offering, Porsche gains full autonomy over its destiny, so to speak. Prior to the initial public offering, Volkswagen exerted management and strategic influence on Porsche. They also accounted for profits generated by Porsche as their own through the profit and loss transfer agreement. This is no longer the case with the IPO. Porsche is now a standalone entity with management that is autonomous in terms of determining the strategic direction of the company.
Porsche is also not short of ambition as a newly liberated company, in 2030, Porsche’s goal is for over 80 per cent of new vehicles delivered to be battery-electric vehicles (“BEVs”). As part of its strategy, the company is also working toward a net carbon-neutral value chain in 2030 and a net carbon-neutral use-phase for future BEV models. Porsche is said to be in a robust financial position on the financial front. The company expects to achieve between EUR 38 billion and EUR 39 billion or approximately US$ 37 billion.
The company also anticipates a return on sales of between 17% to 19%. This is coupled with the guidance of 25% to 27% EBITDA margins.
These assumptions are premised on the Euro remaining weak relative to other major currencies. This expectation is likely the result of Porsche’s strategy to drive revenue growth by international exports. During the initial public offering or IPO, Porsche announced that it was offering an allotment of shares to retail investors of about 7.7% of the total placement volume. Porsche reports that, “As the offer was oversubscribed, not all purchase orders from retail investors could be considered in full. All orders placed by retail investors with syndicate banks were allocated according to the following allocation key: Up to an amount of 30 Preferred Shares, each order received a full allocation. Higher orders were allocated approximately 23% for the Preferred Shares exceeding this amount.”
By all standards, the initial public offering by Porsche was a success, albeit the shares are trading at levels slightly lower than the debut price. The equity offering was successful and due to the high levels of demand for the scrip there literally was not enough to go around to the extent that the banks that were contracted to handle the offering had to ration the shares to be allotted to investors.
- Porsche’s IPO which was originated by Volkswagen, comprised the issuance of preference shares which resemble fixed income securities in nature in the sense that they accrue a fixed rate of dividends that must be paid to holders.
- An environment like the kind obtaining in the global economy that is characterized by rising interest rates, slow growth, rising inflation, and a strengthening United States dollar coupled with heightened volatility and uncertainty does not support an investment in equity offerings that are viewed as risky.
- On that basis it is commendable that Porsche’s IPO initiated by Volkswagen achieved its success.
For its part, Porsche looks like a sound investment with good prospects. Its prescient corporate financial strategy must be credited to the company’s management. Credit is also due to Volkswagen for the timing of the equity offering. Presently conditions have not been worse for any kind of equity offering. A slowing global economy is characterized by rising inflation, recession, high-interest rates, and a strong United States dollar.
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Conventional finance theory will advise that raising capital on the public markets can be an uphill task when an economy is slowing. A booming economy characterized by low-interest rates with increasing growth rates is the most conducive for an equity offering, more so an initial public offering. A further stroke of genius on the part of Volkswagen and Porsche is that the equity offering comprised preference shares.
The preference shares comprise 12.5% of the issued share capital of Porsche.
This is a stroke of genius in the sense that preference shares, by their nature, resemble fixed income security which would be in high demand in the current environment where interest rates are elevated or are on the upward path. The preferred share component of the IPO must have been appealing and contributed to the offering being oversubscribed.
Preference shares are shares that generally carry with them voting rights and accrue a fixed dividend rate like a fixed income investment instrument. Other features of preference shares vary according to the company laws of a particular jurisdiction. The nature of the offering also betrays the desire of management to retain management and strategic control of Porsche.
- Volkswagen’s success in selling Porsche’s shares in the public markets also came down to the intrinsic advantages enjoyed by Porsche, from the quality of its products, its strong financial position, and its growing export business.
- Porsche’s IPO is, therefore, a crash course for entrepreneurs and executives on how to raise capital from the public markets in uncertain times.
The IPO raised EUR 9 billion for Volkswagen but did not result in the risk or potential of control changing hands.
The case of Porsche’s IPO is instructive to entrepreneurs and managers of businesses today that are looking to raise cash to shore up their balance sheets in frothy markets and uncertain times. Volkswagen successfully floated an IPO of its key unit Porsche firstly because the company has, that is, Porsche produces high-quality products that are in high demand.
The classic versions of Porsche’s 911 models are like bank accounts in that they appreciate, unlike other motor vehicles which are said to lose no less than 20% of their value as soon as they are driven off the car dealership. Classic 911 models are collectables which can hold their values over time.
This phenomenon speaks to the quality of the products that Porsche makes. Quality. Secondly, the company is in a sound financial position.
In its own words, Porsche is in robust financial shape. This state is not achieved by accident. It is the result of deliberate and intentional effort in terms of financial prudence on the part of its management. Lastly, the company has strong prospects in growing export markets.
Therefore it is banking on the Euro remaining weak because then it will earn more income and profits from its overseas markets.