By Adil Amlaiky, Ilan Bernadski, and Greta Horn (McGill University), and Yair Trachtenberg, Nikita Bezverkhniy, Marcus Walter, and Julia Donato (ESADE)
Photo: Eric Saunders (Unsplash)
Summary of IPO
One of the largest high-performance German vehicles, Porsche, has finally gone public on the Frankfurt Stock Exchange. Among the greatest IPOs carried out in Europe, Porsche has market capitalization of about €78 Billion. With sustainability trends on the rise, Porsche intends to target the BEV (Battery-Electric Vehicles) industry with the hope of attaining 80% of sales solely derived from electric vehicles by 2030.
Porsche parent company, Volkswagen group, has published 25% of Porsche AG’s to common shareholders. With a valuation of 78bn euros, initially priced at 82.50 €/share.
Company and IPO Profile
Sector: Automobile
furt Stock Exchange
Amount raised: €9.2bn
Offered price and number of shares: between €76.50 and €82.50, 911m shares
Over-allotment option: 14,853,260 Preferred Shares
Equity offered: 25%
Valuation and relevant multiples at IPO:
- Market Capitalization: €78 billion
- EV: €83 billion (as of 14/10/22)
- LTM EV/Revenue: 2.4x
- LTM EV/EBITDA: 9.0x
Joint Global Coordinators: BofA Securities, Citigroup, Goldman Sachs and J.P. Morgan.
Strategic Rationale
Given that Ferdinand Porsche created the Volkswagen Beetle, both Porsche and Volkswagen have been historically intertwined. Additionally, the timing of the IPO is unfavorable, given that European shares have taken a downturn due to a stop in gas supply from Russia, and soaring inflation. The history between both brands and the timing of the IPO beg the question: why would Volkswagen spin off Porsche?
The diesel emission cheating scandal impeded Volkswagen’s path towards electrification, monetarily. With a potential gain of €19.5Bn and a hurtful interest rate environment, Volkswagen needed cash to retool its factories in light of it fully committing to electric models. Ingo Speich, a top 20 VW shareholder mentioned: “The Porsche IPO bears the hallmarks of inadequate corporate governance at the VW Group.”
Moreover, an independent Porsche would highlight its luxurious side. Ferrari, which had its IPO in 2015, trades at 38 times its EPS. With Ferrari having eclipsed its manufacturing beginnings through an IPO selling luxury, Porsche decided to mirror the strategy. Oliver Bloom, being the CEO of both Volkswagen and Porsche, will oversee the maintenance of close ties between Volkswagen and Porsche. The relationship will be useful, given that Porsche aims to have 80% of its vehicles electric by 2030.
Market Reaction
Build Up
With HSBC’s Porsche AG valuation range being between €44.5Bn and €56.9Bn weeks before the IPO, there were uncertainties regarding the timing of the IPO. However, Porsche AG moved forward with a target range of €76.50 to €82.50, pricing the IPO at €9.2Bn on the upper range.
Porsche offered 911mn shares with a P911 stock ticker, both of which are based on its iconic 911 model. The shares were split equally between preferred shares, which prioritize the receipt of dividends, and ordinary shares, which involve voting rights. Given that 25% of listed shares are preferred shares, 12.5% of total shares were floated. Moreover, 51% of proceeds will be dedicated to the electrification of the Volkswagen Group, whereas the remaining 49% will be offered to shareholders through dividends.
A greenshoe option, which allows a stabilization manager to buy shares at the IPO price 30 days after the IPO for stability, was included in the deal. The Porsche-Piëch family are set receive 25% of voting shares, putting them back in control. Large investors, to which 40% of shares were sold include T. Rowe Price, the Qatar Investment Authority, Norges Bank Investment Management, as well as Abu Dhabi based ADQ.
Launch
The stock launched at €82.50, the highest point in its target range. The deal was oversubscribed in a matter of hours after the trading debut. Shares subsequently mounted to €84.00, which is 2% greater than the IPO price. Porsche AG’s revenue has increased by 28.5% since 2018 and the firm has maintained healthy operating profit margins of 20%. However, the following Monday, shares fell to €81.00, which is 1.8% below the IPO price. Despite Porsche AG’s strong performance, the drop was a reflection of the inescapable negative risk sentiment looming in the market. As of October 14th, shares have dropped by ~30.6% from IPO price.
Potential Risks and Downsides
Given that the greenshoe option was exercised on this deal to stabilize the price, there have been fluctuations due to the negative market risk sentiment. In an increasing interest rate environment with inflation soaring due to the Russia-Ukraine war, investors are uncertain as to whether there will be a recession. There have also been supply chain disruptions among car makers. Moreover, deal activity in Europe has been declining, with IPOs being worth £4.8Bn as opposed to £48Bn in 2021.
Despite the obstacles, Porsche is relatively safe from recessionary worries, given that its customer base is composed of wealthier buyers, who usually have enough means to absorb inflation without reducing their spending habits. Furthermore, Porsche’s brand name and healthy profits put it in a strong position regardless of market sentiment.
However, given that Volkswagen is largely behind competitors in terms of corporate governance, investors must accept that it will not become a leader anytime soon. Moreover, Porsche’s decision to expand into utility sports vehicles is unhelpful regarding its case to push a luxurious image to the level of Ferrari.