With $12-billion debt, Porsche hesitates to raise Volkswagen stake

All is not well for Porsche, the German carmaker that appeared to have made a killing from hedging shares of Volkswagen. While the company announced an astonishing €6.8 billion ($9 billion) in net profit booked on cash-settled options of Volkswagen shares, up from €850 million ($1.1 billion) last year, it said its net debt stood at a higher than expected €9 billion ($12 billion), up from €3.1 billion six months earlier. (See:  Porsche acquires controlling stake in Volkswagen)

Porsche fell as much as 7.7 per cent in German trading after the Stuttgart-based company made this disclosure. It said it still aims to buy more Volkswagen shares but that any investment will depend on economic conditions. A majority stake in VW boosted Porsche's first-half net income more than fourfold to €5.55 billion and the company had pledged to lift the holding to 75 per cent this year in order to add the larger company's cash flow on to its books.

The value of Volkswagen shares, now 23 per cent higher than at this time last year, has been driven up by expectations that Porsche would increase its 51.05-per cent stake in the German carmaker to beyond 75 per cent so that it can gain majority control under German law. The stock jumped again last week, when Porsche said it had renewed a €10 billion ($13.3 billion) credit facility that it could expand by another €2.5 billion ($3.3 billion).

Increasing its stake in Volkswagen also seems inadvisable since the European Court of Justice has yet to rule on Germany's so-called Volkswagen Law, which allows a stakeholder with as much as 20 per cent of a company to block a takeover. (See: Porsche puts Volkswagen acquisition plans on hold )

The German state of Lower Saxony is Volkswagen's second-largest shareholder, with a 20.3-per cent (blocking) stake, but it is widely expected that the European Court will not make its decision until at least the end of 2009, and its outcome will be a clear determinant of Porsche's decision whether to raise its stake past 75 per cent. (Also see: Volkswagen shares surge on news of Porsche's intent to increase stake)