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Power shift for Škoda ownership

EU ruling gives Porsche green light to take over Volkswagen

By Michael Heitmann
Staff Writer, The Prague Post
October 31st, 2007 issue

A recent ruling by the European Union’s highest court has cleared the way for the sports car manufacturer Porsche AG to take control of Volkswagen, Europe’s largest automaker.
The ruling, issued by the European Court of Justice Oct. 23, could have lasting implications for Škoda Auto, a Volkswagen subsidiary and the Czech Republic’s dominant automaker, and state-controlled companies throughout the EU.
The court came out against a 1960 German law, known as the “Volkswagen Law,” that guaranteed the state of Lower Saxony a blocking vote on Volkswagen’s operations despite its limited share in the company, totaling only 20.3 percent. The law had capped the voting rights of external shareholders, like Porsche, at 20 percent despite whatever actual share held.
In preparation for what was a widely expected verdict, Porsche, based in Stuttgart, Germany, has upped its holding in Volkswagen to a dominating 31 percent over the past two years, at an estimated cost of $5 billion (94.5 billion Kč).
“We obviously have a high interest in exercising our voting rights in full,” said Porsche CEO Wendelin Wiedeking in reaction to the verdict.
His company has raised a $10 billion credit line with banks to secure a commanding majority in Volkswagen, should the need arise. The media-savvy Wiedeking has been guarded about his future plans for Volkswagen, but last year he signaled that he was prepared to take on the Japanese giant Toyota, which recently surpassed General Motors as the world’s largest car manufacturer.
“If anyone can challenge Toyota, it is Volkswagen,” he told the German Press Agency at the time.
Morgan Stanley’s Adam Jonas wrote in a research note that the court’s decision marks a historic moment, as Volkswagen now moves from its comfortable status as a state-controlled company to being managed by a family-run firm with notoriously high standards.
“Porsche has some of the most skilled capitalists in the global auto sector, with an obsession for efficiency, product quality and brand management — all skills that can help VW greatly,” he said.
It is expected Volkswagen’s change in management will eventually trickle down to Škoda Auto, though Škoda spokesman Jaroslav Černý declined to detail how the court’s ruling might impact the company’s operations.
“Škoda Auto is 100 percent owned by Volkswagen and the abolishment of the law is not going to change this,” he said.
Commerzbank auto analyst Albrecht Denninghoff is optimistic about Škoda’s future under Porsche:
“As Škoda is very profitable and has — in my and probably also in Porsche management’s view — tremendous opportunities for profitable growth, the likelihood for higher growth rates would increase with a Porsche takeover.”
Under Porsche, Volkswagen will, in a way, return to its origins. Ferdinand Porsche, who was born in what is now Vratislavice nad Nisou, a district of Liberec, north Bohemia, designed the original Volkswagen Beetle in 1936 to meet Hitler’s ambition for a “people’s car.”
The two companies have already been close collaborators with Porsche, which is 14 times smaller than Volkswagen, relying on the larger manufacturer to produce parts at plants in Germany and Slovakia.
Beyond Volkswagen, the court’s decision should reinvigorate the European Commission’s fight against special voting rights in privatized companies, called golden shares, analysts say.
“The commission is likely to regard the VW judgment as strengthening its hand against member states that have golden shares, and is therefore more likely to bring proceedings against such member states,” said Matthew Levitt, a Brussels-based competition lawyer at the law firm Lovells.
Charlie McCreevy, the internal market commissioner, has already threatened action on a new law passed by the Hungarian Parliament Oct. 9. The bill protects strategic companies from foreign takeovers, and is supposed to thwart a bid by Austria’s OMV to take over the Hungarian oil company MOL.

Michael Heitmann can be reached at mheitmann@praguepost.com


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