Porsche poses a governance dilemma for investors considering an IPO

Porsche poses a governance dilemma for investors considering an IPO

Written by Caroline Cohn, Danilo Masoni and Simon Jessup

LONDON/MILAN (Reuters) – Porsche’s leadership formation and the limited influence of investors in the stock market after its initial public offering have prompted some fund managers – particularly those focused on governance issues – to think carefully about whether to invest in the listing.

Volkswagen (ETR) said it will list its sports car brand Porsche AG this month or early next month. Valued at up to 70-80 billion euros ($70-80 billion), it may be among the largest listed companies in Germany and the largest in Europe since 1999.

Sources told Reuters on Thursday that Volkswagen’s supervisory board is scheduled to meet on Sunday evening and is likely to release details on the price range, valuation and confirmed core investors for Porsche AG afterwards.

While the luxury car brand is doing well with investors on environmental issues, aiming to make more than 80% of newly sold cars fully electric by 2030 from 13.6% in 2020, some are concerned about its management.

The main issue is the fact that Oliver Blume, who became president of Volkswagen this month, will also remain as CEO of Porsche, raising a potential conflict of interest.

Another is the relatively small percentage of shares offered to outside investors – only 12.5% โ€‹โ€‹of Porsche’s total capital – which leaves them with little influence.

Porsche is “definitely something we’ll take a look at, but we have to walk away and give governance a really good idea,” said Ben Ritchie, head of European equities at investment firm abrdn.

“It’s not great but is it acceptable?” he added.

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Scandals like Dieselgate, when Volkswagen admitted in 2015 to cheating US diesel engine tests, are a reminder to investors that environmental, social and governance issues are not just about the environment but also about the way companies are run.

Bloom played down concerns about his dual role in an interview with Reuters this month, saying only some investors had raised questions about the structure.

He described the “great interest” from investors in the IPO.

Georg Kell, head of Volkswagen’s independent sustainability council, defended Bloom’s decision to be CEO of both Volkswagen and Porsche.

“Keeping Bloom in the dual job is a winner,” he said. “Bloom will bring the good cultural experience of Porsche to the Volkswagen Group as a whole.”

Better (NYSE:) practice

Porsche valuation estimates vary widely. HSBC analysts estimated the price this week at 44.5-56.9 billion euros, but a source close to the listing said it was likely to be between 70 and 80 billion euros.

Among Porsche’s listed competitors, Ferrari (NYSE) has a market capitalization of โ‚ฌ36 billion, while Mercedes-Benz is worth just under โ‚ฌ62 billion.

โ€œAs a result of the capital and management structures, there is potential for conflict of interest within governance,โ€ said Richard Hilgert, Senior Equity Analyst at Morningstar.

“Some investors may be restricted by environmental, social and corporate governance guidelines from owning Porsche AG,” he added, though he said the offer could be attractive to investors who focus less on such issues.

Chi Chan, European equity portfolio manager at Federated Hermes (NYSE:), highlighted Blume’s CEO’s dual roles as an issue in written comments to Reuters, echoing the concerns of Volkswagen investors Union Investment and DWS.

โ€œThe best governance practice is for the board to have only one executive position to ensure its focus and avoid conflicts of interest,โ€ Chan said.

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He also noted a low percentage of independent directors in the company, which will continue to be heavily influenced by Volkswagen and its main shareholder, Porsche SE.

โ€œWhile we try to engage with companies to improve their governance…it is hard to see Porsche SE/VW/Porsche AG responding to any of these best practice moves (possibly separate CEOs, in a timely manner), so investors need to be wary of them in deciding how much impact it will have. on the attractiveness of stocks for them.โ€

Gilles Guibot, head of European equity strategies at AXA Investment Managers in Paris, said he is concerned about the fact that only preferred shares, which do not have voting rights, will be issued.

“This means that minority shareholders will not have rights,” he said.

Andrea Scurry, senior portfolio manager at Milan Asset Management Limanic, an investor in Volkswagen, noted that the small proportion of shares offered is a potential deterrent.

“There will be very few shares on offer, and I don’t think they will give me shares.”

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