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Monday, 23 October 2017

IFR Top 250 2007: Easy driving

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Priced well below market value, Porsche's takeover offer of Volkswagen was never expected to generate much interest among shareholders. But it was still required to be backed by the necessary funding. Although it will now be reduced, the initial €35bn loan generated €50bn in syndication as banks took the opportunity to cement relationships, as David Cox reports.

In March 2007, to support one of the more unusual takeover bids of recent times, German luxury car maker Porsche put in place a €35bn loan to support its mandatory takeover for Volkswagen.

But despite the loan raising a staggering €50bn by the time syndication ended in June, it was destined for a severe reduction after the takeover offer resulted in a tiny take-up. Less than 1% of VW stock was tendered.

That was no surprise. Porsche's offer had been sparked in March when the group lifted its stake in Volkswagen to 30.9%, just above the 30% level at which German stock market regulations say the group must make a bid for the rest of company.

Porsche set the offer price at €100.92 per share – the absolute minimum at which it was legally required to bid – meaning the offer was substantially below the €114.10 at which VW's shares opened after the announcement.

From the outset, therefore, the offer was not expected to attract a significant take-up. Deutsche Bank noted that Porsche's aim was not to take full control of VW, but that the move was rather a "tactical manoeuvre to gain future flexibility".

Porsche was nevertheless required to have funds supporting the offer. To this end the group mandated ABN AMRO, Barclays, Commerzbank, Merrill Lynch and UBS to arrange a €35bn loan, split into a 364-day tranche, a 364-day tranche with a one-year term-out option, a three-year piece and a further three-year tranche with a two-year term-out option.

At this size the facility was set to equal Enel as the largest European loan of 2007. At the time of writing, though, Porsche had already reduced the facility to €28bn through the cancellation of the three-year tranche. This was set to be followed by a further reduction, with the group looking to turn the acquisition loan into a two-year working capital line.

As it is widely assumed that Porsche intends to increase its stake in VW to above 50%, the final loan will include a use of proceeds clause to allow this stakebuilding to continue.

Once the offer period is over, Porsche will be free to make further undisclosed purchases in VW and is obliged to tell the regulator of its moves only after its stake has reached 50%. Under stock market rules Porsche is not be required to make a mandatory offer for the rest of VW should it get to the 50% mark.

As the final size of the loan was always going to be dependent on the share offer take-up, pricing was to be set according to size. If the bid was successful and the loan sized at more than €20bn, then pricing would range from 40bp to 47.5bp over Euribor. If the loan were to end up at less than €10bn, then pricing would fall to 20bp for the two one-year tranches (the others being cancelled.)

Porsche does not have a rating and has no plans to secure one, but the group is generally seen in the strong A category. It has backup lines in place but had never attempted anything on this scale.

Although pricing looked competitive for such a sizeable loan, the group was paying an acquisition premium when compared to its most recent revolver, which paid 17.5bp for the first five years, and against the CDS, which trades around the 20bp mark.

In syndication, banks were asked to sub-underwrite €1.75bn or €1.25bn for an all-in fee of 25bp or 20bp, respectively. Given that fees would be paid on final allocation, Porsche offered prospective underwriters a holding fee in the event that the entire facility was cancelled.

Paradoxically, given the likelihood of a severe reduction, the facility found the bulk of its liquidity at the top ticket level. But even without majority control of VW, Porsche is still assumed to have effective control of the group. Lenders therefore took the opportunity to cement a relationship with what will become Europe's largest carmaker, without the necessity of a huge capital commitment.

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