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.

Volkswagen CEO Winterkorn to be Porsche SE boss, sources say

Volkswagen AG CEO Martin Winterkorn is set to also become CEO of Porsche Automobil Holding SE, two people familiar with the matter said.

One source said that Winterkorn wants to "assume responsibility" at Porsche SE, which owns the Porsche sports car company and holds Porsche's 51 percent stake in VW.

The holding company was forced by debt troubles to abandon efforts to seize full control of Europe's biggest carmaker.

The supervisory boards of both German carmakers were poised to address the issue at separate meetings on Thursday, one of the sources said.

Volkswagen's supervisory board is also set to approve the purchase of a minority stake in family-owned Porsche SE's healthy sports car business, Porsche AG, as a first step in integrating the two German carmakers.

At Porsche SE, Winterkorn would succeed Wendelin Wiedeking, who was CEO of the holding company and Porsche AG but departed after losing a power struggle with VW.

Wiedeking's post as the head of Porsche AG was filled last month by Michael Macht.

Two VW supervisory board members told Reuters on Wednesday that Volkswagen and Porsche had broadly agreed on details for a deal to combine two of Europe's most storied automakers.

Volkswagen is set to buy a stake of up to 49 percent in Porsche AG in a first step toward creating an "integrated" automotive group by the end of 2011.

Analysts value Porsche's sports car business, which makes the famed 911 models, between 8 billion and 11 billion euros ($11.4 billion and $15.7 billion).

Porsche, VW May Be Dubbed 'Auto Union'

As Porsche and Volkswagen work out details of their eventual merger, Reuters reports the companies may resurrect the Auto Union name. The moniker was previously used in the 1930s for the company that evolved into Audi.

Porsche and Volkswagen continue to work on a deal.

Porsche and Volkswagenhave broadly agreed on sale terms, and the name Auto Union may be resurrected, Reutersreports.

The new entity could be led by Volkswagen CEO Martin Winterkorn, and Porsche would retain some independence — similar to Audi's setup within the Volkswagen Group. Porsche would be the 10th brand in the company.

VW would buy up to 49 percent of the Porsche sports-car business, the first step in an integration of the two companies that would be completed in 2011, according to Reuters.

Auto Union is a famous name that dates to the 1930s, and its cars were legendary racers. The company has since evolved into Audi.

The sale is a reversal after Porsche's attempts to take over its much larger rival, VW, failed.

Wiedeking's future is in the balance

Porsche's plan to merge with Volkswagen has intensifed a power struggle that could see the spectacular fall of the sports car maker's CEO Wendelin Wiedeking.

The German press says that Wiedeking faces his Götterdämmerung after his plan for Porsche to take control of Volkswagen, a company 15 times Porsche's size, was abandoned.

Laden with debts of 9 billion euros ($11.99 billion) from its acquisition of 51 percent of VW shares, Porsche Automobil Holding on Wednesday halted its original plan to seize control of VW, which is Europe's largest automaker, by raising its stake to 75 percent.

Instead the Porsche-Piech clan, which controls Porsche, wants to merge their Stuttgart-based sports car business with VW under a new holding company. Porsche would become the 10th brand in VW group alongside units such as Scania trucks, Skoda, Seat, Bentley and Lamborghini.

Winterkorn favorite

It's not clear who will run the new company. German press reports say VW group CEO Martin Winterkorn, 62, is favorite because Wiedeking has made too many enemies with his outspoken attacks on the way VW is run.

“Wiedeking has broken too much china,” said Stefan Bratzel, head of the Centre of Automotive Research at the University of Applied Sciences in Bergish-Gladbach, Germany.

Winterkorn also is a protege of VW Chairman Ferdinand Piech, who wants Wiedeking and Porsche's Chief Finance Officer Holger Haerter to be fired for amassing huge debts at Porsche, according to German media reports.

Wiedeking admits that a merger with VW is not what he hoped for. “It's not a marriage made in heaven, more a marriage of convenience,” Wiedeking told Porsche's 3,000 employees in Stuttgart on Thursday.

When Porsche first began building up its stake in VW in 2005, Wiedeking upset Wolfsburg's powerful trade unions by calling for “sacred cows” to be slaughtered.

He challenged VW's labor agreement that pays the company's German workers above the industry average and called for the abolition of the so-called VW Law. The law gives the north German state of Lower Saxony where VW is based a blocking minority on strategic decisions because it has a 20 percent stake in VW.

Wiedeking also upset Piech by criticizing as cars, which the VW patriarch had championed, such as the Bugatti Veyron and VW Phaeton.

Until the extent of Porsche's debts became clear in recent weeks, Wiedeking, 56, had seemed untouchable.

He was praised as one of the auto industry's brightest stars after turning Porsche from a bankruptcy candidate into the world's most profitable carmaker. His salary of 80 million euros last year made him Germany's highest paid boss.

Wiedeking loses key ally

Now some of Wiedeking's staunchest supporters are distancing themselves from him.

Porsche's labor boss Uwe Hueck was previously a key ally of Wiedeking's in challenging VW's trade union leaders and the VW Law. Hueck now says he wants a similar law at Porsche to protect its workers..

“I am concentrating on the workforce, the bosses are secondary,” Hueck said.

Porsche's workers are disillusioned. “Porsche is finished. We're VW now,” one worker told reporters at the factory gates.

Lower Saxony and VW labor leaders have threatened to block a VW-Porsche merger unless they win key concessions.

Lower Saxony Premier Christian Wulff insisted on maintaining the state's blocking minority stake, two seats on the supervisory board, and a veto on plant closures. He added that a merger was by no means a done deal.

VW's employee leaders said labor should continue to have a major say in how the new company is run.

Porsche will struggle to dictate terms of how the new company will look, analysts and bankers close to the deal say.

"Volkswagen and Lower Saxony are now in the driver's seat," Credit Suisse analyst Arndt Ellinghorst said on Thursday. "Porsche needs VW's cash, and VW doesn't need Porsche's debt."

Porsche plans coup against Piech

Porsche Chairman Wolfgang Porsche has gained majority support among the two clans that own his family's carmaker to remove cousin Ferdinand Piëch from his post as Volkswagen chairman, a German magazine reported.

"It is not a question of 'if', rather 'when' and 'how'," Focus quoted one Porsche manager as saying.

The news magazine report ahead of its publication on Monday comes after a turbulent VW supervisory board meeting on Friday, where Piëch broke ranks with the other three Porsche representatives on the board.

Porsche had been quoted in comments made yesterday to Focus as saying of Piëch: "I am horrified by the behavior of the chairman."

The challenge is the result of long-running tensions between Piëch, part owner of Porsche, and his cousin over control of Volkswagen -- their company's largest investment in which the sports car maker is poised to take the majority this year.

Piëch, who has run Audi and Volkswagen as CEO before taking over as chairman in 2002, is a calculating strategist who has survived several coup attempts.

His power base stems from close allies like VW CEO Martin Winterkorn and the unwavering support from VW's powerful unions, which oppose Porsche's attempts to limit their influence.

Volkswagen declined to discuss the report while Porsche was not immediately available for comment.