VW to buy 42% stake in Porsche sports car unit

WOLFSBURG/STUTTGART, Germany (Reuters) -- Volkswagen AG agreed today to buy a 42 percent stake in the sports car unit of debt-ridden Porsche Automobil Holding SE in another step toward combining the two German carmakers into a European automotive giant.

VW will pay up to 3.3 billion euros ($4.7 billion) this year for the initial stake in the unit, Porsche AG, paving the way for the creation of an integrated automotive group by the end of 2011, VW and Porsche said in statements after board meetings. Volkswagen CEO Martin Winterkorn, who is poised to run the combined entity and was named head of Porsche SE on Thursday, said the deal marked "a new era" for both companies. "Porsche is a real enrichment for our company's portfolio," he said. The combined company will have 10 brands, adding the Porsche marquee to a stable that already includes Audi, Bentley, Bugatti, Skoda, Seat and Lamborghini. To finance the purchase, Volkswagen plans a capital increase of preference shares in the first half of 2010, VW said.

Piech's triumph Porsche's surrender comes at the end of a months-long power struggle that eventually led to the departure of Porsche CEO Wendelin Wiedeking. It marks a triumph for Volkswagen CEO Winterkorn and VW Chairman Ferdinand Piech. Porsche had sought to seize control over Volkswagen -- already Europe's biggest carmaker -- as a way to gain access to key components and technologies it needs to meet stringent new pollution rules. That left it with just over half of VW votes. But Porsche's takeover attempt backfired after it took on more than 10 billion euros in debt, forcing it to seek help from Volkswagen. VW supplies components for about a third of all Porsche cars, including bodies of the four-door Cayenne and Panamera models. VW's powerful labor chief welcomed the agreement. "Today industrial history was made," Bernd Osterloh said. In a further step to alleviate Porsche SE's debt, Porsche's controlling families will sell their automobile trading business Porsche Holding, Europe's largest dealer group, to Volkswagen. The business, with an enterprise value of 3.55 billion euros, will be sold by 2011. Porsche also aims to raise capital by issuing new ordinary and preferred shares, probably in the first half of 2011.

Qatar stake The Porsche and Piech families will remain the largest shareholders in the company to arise from the combination of VW and Porsche SE, Winterkorn said. VW's home state of Lower Saxony, which owns a stake of 20 percent in Volkswagen, will retain the right to block important decisions and to nominate two members of the supervisory board. The completion of the sweeping deal depends on the approval of Porsche creditor banks and a final clarification of structural issues, Porsche said. The deal is set to make the Gulf state of Qatar the third-largest investor in the combined company, VW's CEO said, without specifying how large a stake the state will hold.

Piech stymies Porsche over Audi

Volkswagen Chairman Ferdinand Piech broke ranks with Porsche, his own clan's sports car maker, by tacitly backing VW staff in a boardroom showdown as thousands of workers protested outside.

A source briefed on Friday's events said Piech was not present during a VW supervisory board vote, allowing 10 members from the carmaker's labor unions to outvote the nine remaining shareholder representatives -- including three Porsche executives -- in a motion concerning VW's premium unit Audi.

The defeat for Porsche Automobil Holding means Volkswagen's largest shareholder will need approval from the VW supervisory board for any form of cooperation with Audi.

Volkswagen's luxury brand is a potential competitor to Porsche because Audi makes sporty cars such as the TT roadster and R8 high-performance coupe, which rival Porsche's Boxster and 911.

Porsche Chairman and VW board member Wolfgang Porsche attacked his cousin in a magazine interview, in a rare show of divisions between the Porsche and Piech clans.

"I am horrified by the behavior of the chairman," he was quoted as saying of Piech in Germany's Focus magazine. A preview of the article was released ahead of publication on Monday.

Extra power

The squabble took place as VW staff staged one of the biggest protests in the carmaker's history to support a German law giving labor and the state a big say at VW, which has passed Ford Motor Co to become the global number three automaker.

Both the European Commission and Porsche, poised to boost its VW stake to a majority, oppose the so-called VW law, which gives the state of Lower Saxony extra power to shape company strategy with its shareholding of just over 20 percent.

Union IG Metall said 40,000 Volkswagen workers from inside and outside Germany protested near its Wolfsburg headquarters. Staff from MAN, a truck maker in which VW holds a large stake, joined them.

"In times of shareholder value and finance market-driven capitalism we need more, not fewer, VW laws in our country," IG

Metall's leader Berthold Huber shouted in a passionate address to the noisy demonstration.

After the EU's highest court ruled last October that the 48-year-old law violated EU rules on the free flow of capital and needed changing, the German government made changes aimed at satisfying concerns in Brussels.

But EU Internal Market Commissioner Charlie McCreevy rejected those changes as insufficient.

Huber told the Westdeutsche Allgemeine Zeitung daily he would shift the protests to Brussels if the Commission lodged another complaint against the VW law, as McCreevy's office has threatened.

Earlier this week, Lower Saxony's premier said the state would raise its stake in Europe's biggest carmaker to 25 percent to retain its blocking minority if necessary.