German car giants Volkswagen and Porsche to complete merger

The boards of Porsche Automobil Holding SE (ETR:PAH3) andVolkswagen AG (ETR:VOW), or VW,  have approved a merger plan that will see the creation of an integrated automotive company on 1 August 2012.

VW will pay about €4.46bn ($5.59bn) in cash plus one VW common share for the 50.1% it does not own of Porsche AG, Porsche SE’s automotive business. The plan allows the two companies to complete the merger two years before it would have been possible to execute a tax-favourable transaction.

VW and Porsche SE entered into a merger agreement in 2009 and were initially planning to finalise it by the end of 2011. However, the companies announced last September they would not be able to proceed with that arrangement due to legal obstacles. Moreover, it would have been unfeasible in economic terms.

If VW had exercised its options to acquire the remainder of Porsche SE’s shares before August 2014, the move would have left the companies with a hefty tax bill.

After extensive consideration of alternative routes, VW and Porsche SE have found a way to accelerate the combination in an economically feasible manner. The announced plan classifies the transaction as a restructuring under Germany’s Reorganisation Tax Act, making it a low-tax endeavour.

VW’s chairman Martin Winterkorn described the integration of the two automotive  businesses as a positive development not only for VW and Porsche but also for the German industrial sector. The combination will create an even stronger automotive enterprise, both in financial and strategic terms.

Closer cooperation will make it possible to seize new growth opportunities in the lucrative premium vehicles segment through investment in innovative products and technology. This in turn will deliver benefits to customers, employees and shareholders, Winterkorn stated.

The consolidation of Porsche AG into VW’s accounts is expected to results in a non-cash contribution of more than €9bn to VW’s financial results for the current year. However, the purchase price and Porsche AG’s debts, which amount to some €2.5bn, will shrink VW’s net liquisity by about €7bn, the company said.