Porsche and VW finally map out merger plans

Frankfurt: The feud between Porsche and Volkswagen (VW), and between the Piëch and Porsche families that own most of them, had dragged on for two years.

First, tiny Porsche, which makes 100,000 cars a year, tried to take control of VW, Europe's biggest carmaker, which makes 6 million a year. But the sports car firm buckled under the debts it acquired along with 51 per cent of VW's shares and options to buy yet more.

Then VW tried to take over Porsche, but that deal also stalled until Porsche's boss and finance chief resigned last month.

Now the two companies, with the help of one of Qatar's sovereign-wealth funds, have at last laid out a road map for a merger by 2011 at the latest.

Many of the details are still rather vague, especially regarding the Qatari investment, but there is no longer any argument about where the two companies are heading. VW is buying 42 per cent of Porsche for 3.3 billion euros (Dh17.4 billion). It will pay as much again for a big car dealership Porsche owns, which may be sold later to shore up the merged firm's finances.

VW will also raise up to 4 billion euros in new capital to fund the purchase, in order to keep its balance sheet strong and hold on to its solid credit rating.

Qatar Holding will buy 10 per cent of Porsche, plus most of its options to buy VW shares. Later, VW's management says, the two carmakers will merge fully, with the two families owning some 40 per cent of the new entity, the German state of Lower Saxony 20 per cent, and Qatar Holding slightly less than that. Barely a fifth of the shares will float freely.

VW's shares have gyrated wildly since the deal was announced on August 13, as investors tried to work out who would buy what, when and at what price. At one point they fell by nearly 16 per cent, hinting at fears that VW is paying too much to fold Porsche into its large stable of brands.

(Porsche's offices were raided in an insider trading probe on August 20).

But VW claims that closer integration from shared design and pooled purchasing will, in the long term, boost the merged firm's operating profit by 700 million euros a year.

The underlying strength of the VW group is that it manages to make a range of models that appeal to different segments of the market but use many of the same parts. Although this "platform" strategy is now commonplace within the industry, VW has adopted it without eating into sales of more expensive models.