Porsche’s luxury IPO addresses investor valuation concerns

(Bloomberg) — Porsche is launching its initial public offering as a chance to invest in a company that combines the best of automotive rivals like Ferrari NV and luxury brands like Louis Vuitton. The problem is that not all investors buy it.

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In initial meetings with portfolio managers, the Volkswagen AG unit compared itself to French handbag maker and owner of Cartier Richemont as companies that generate healthy profits and strong sales volumes, according to people familiar with. folder. He also cited Ferrari, which boasts leading margins but delivers only a fraction of the more than 300,000 cars Porsche makes each year.

Among the concerns raised by investors is a listing structure that does not make Porsche more independent of its parent company, said the people, who asked not to be identified as discussing confidential information. They also cite headwinds in the IPO market, which has slowed significantly due to jitters over runaway inflation, rising interest rates and the war in Ukraine that sparked the worst energy crisis in history. Europe for decades.

“Porsche is not a safe bet in a recession because it is not as exclusive as Ferrari,” said Daniel Roeska, automotive analyst at Bernstein. “And if you don’t change governance and let Porsche decide what’s best for itself rather than making group-level decisions, then you’re not maximizing shareholder value.”

The offer, which could be launched as early as September, is set to be one of the largest ever offered in Europe. VW has hired more than a dozen banks to push for the IPO, which could value Porsche between 80 billion euros ($80.5 billion) and 90 billion euros, according to people familiar with the matter. If reached, it could even exceed the current market value of the parent company. It comes at a time when automakers are battling supply chain issues and have embarked on an expensive transition to electric vehicles.

Yet an IPO of this size is so rare in Europe that it can defy the general market meltdown, with portfolio managers forced to scrutinize the candidate as it will automatically enter major benchmarks for shares in the region, the people said.

READ: Volkswagen expected to add more banks to Porsche sports car IPO

Although VW did not provide hard numbers or a valuation target at the meetings in Europe and the United States, the fund managers present had a positive impression of the brand’s potential to increase margins in the medium term. , the sources said. Porsche is holding a capital markets day on Monday where it could plan for another profit push.

But many fund managers remain concerned about Porsche’s low free float of 12.5% ​​and a two-class share structure that leaves little room for greater managerial independence.

VW plans to sell a stake of up to 25% of the preferred shares that do not carry voting rights. The powerful Porsche and Piech billionaire clan, which controls VW through voting shares, would receive a special dividend to fund the purchase of a blocking minority stake in Porsche.

A Porsche spokesperson declined to comment when contacted by Bloomberg News.

Porsche executives “presented their strategy very well for moving the business forward,” said Simon Jaeger, portfolio manager at Flossbach von Storch AG. Still, he warned that the planned ownership structure is set to weigh on the company’s valuation.

Investors have in the past blamed VW’s convoluted governance structure for its subpar stock performance. Preferred shares of VW have fallen by around a quarter this year, valuing the entire company – which also includes Audi, Lamborghini and Bentley – at around 80 billion euros.

Porsche says it stands out among luxury car makers because of its high volumes. The marque sold 301,915 vehicles last year, compared to 11,155 for Ferrari and the 6,178 automobiles shipped by Aston Martin Lagonda Global Holdings Plc. It also touts Porsche’s resilience when it comes to profitability, with unit operating margins averaging 16.1% in the five years to 2021, according to a presentation seen by Bloomberg.

Macro Concerns

But we worry about the macro environment. The auto industry has struggled to ramp up production after the pandemic rattled global supply chains and triggered a shortage of semiconductors. Tesla Inc., the world’s top-selling electric vehicle maker, has lost about a third of its value this year. Even Ferrari, which is aiming for an operating margin of up to 30% by 2026 and is considered the gold standard for successful luxury car IPOs, is down about 16%.

“Porsche’s margin profile puts it at a discount to Ferrari,” said Dev Chakrabarti, portfolio manager at AllianceBernstein. “I would see the company’s valuation approaching $75 billion in an IPO rather than $100 billion as has been advertised.”

There’s one key aspect for Porsche: it’s far ahead of its peers, including Ferrari and Aston Martin, when it comes to electrifying its lineup.

The first IPO meetings were held in Frankfurt, London, New York and Boston, one of the people said, adding that some investors had visited a factory where Porsche assembles the Taycan – an electric vehicle that has surpassed the iconic 911 last year. The automaker is also set to launch a battery-powered version of its popular Macan SUV to take on Tesla’s Model Y.

Porsche “is the closest legacy brand to Tesla in terms of electrification,” Bloomberg Intelligence analyst Michael Dean said in a note this week. “It will be a key competitor to Tesla in 2023.”

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