Porsche plunged the most in more than two years after saying efforts to combine with Volkswagen by the end of 2011 had failed because of pending lawsuits.
The merger has been held up by lawsuits in the US and an investigation by German prosecutors linked to Porsche's botched effort to buy VW. The two carmakers agreed to combine in 2009 after Porsche racked up more than €10 billion (Dh50.1 billion) of debt in the attempt to take over VW.
Short sellers of VW stock have sued Porsche in the US, claiming the carmaker secretly piled up VW shares and later caused the investors to lose more than $1 billion (Dh3.67 billion). A lawyer representing claimants in Germany said yesterday the plaintiffs had officially filed a suit seeking €1.1 billion in damages. Porsche, which has repeatedly denied all wrongdoing, identified the possible German lawsuit as a concern earlier this year.
"The lawsuits are posing risks that cannot be quantified," said Tim Schuldt, a Frankfurt-based analyst at Equinet AG who recommends selling VW stock and has a ‘reduce' recommendation on Porsche shares. "We won't see results on the suits until next year. Moving ahead with a merger in such an unpredictable environment would be the wrong thing to do."
Porsche preferred stock plunged €5.98, or 14 per cent, to close in Frankfurt trading at €37.99, the biggest drop since May 7, 2009. The shares are down 26 per cent this year, valuing the Stuttgart, Germany-based company at €11.7 billion. VW's preferred shares fell €4.20, or 3.9 per cent, to €103.75, giving it a market value of €45.8 billion.
The two carmakers will now need to come up with a new agreement if they intend to combine VW with Porsche's holding company, which owns 50.7 per cent of VW's common shares and 50.1 per cent of the Porsche car-making business. The original deal required the final decisions by the end of 2011.
VW and Porsche also have the option to forego a full merger and instead fold Porsche's car-making business into the VW group while leaving the holding company to manage the Volkswagen shares.
As part of the original deal struck in August 2009, Volkswagen can pay cash for the remaining stake in Porsche's automobile operations through a put/call structure allowing the sports-car maker to sell the rest of its core business to VW. Those options could be exercised between November 2012 and January 2015.
While this option would allow VW to fully fold Porsche's automotive business into the VW group, it would leave Porsche's holding company to manage the VW shares and take legal and financial responsibility for the outcome of the lawsuits. The price to follow this route would be linked to the valuation of the auto-making business at the time of the purchase.
VW said a necessary revaluation of the put/call structure for accounting reasons will have a "clearly positive contribution" to third-quarter figures whereas Porsche said it will likely post a "negative group result" for the first nine months.
Porsche's third-quarter earnings may be reduced by about €1.6 billion because of the revaluation of the holding company's remaining stake in its car-making operations, a person familiar with the matter said.
The exact impact of the non-cash adjustment of the auto unit's valuation on Porsche's books will be released when the holding company publishes results in late October, the person said, declining to be identified discussing the matter before an official announcement.