Analysis-Porsche poses governance dilemma for investors weighing IPO

By Carolyn Cohn, Danilo Masoni and Simon Jessop

LONDON/MILAN (Reuters) – Porsche’s leadership set-up and the limited influence for stock market investors after its IPO are prompting some fund managers – particularly those focussed on governance issues – to think twice about whether to invest in the listing.

Volkswagen (ETR:) has said it will list its Porsche AG sports car brand this month or early next. Valued at up to 70-80 billion euros ($70-80 billion), it could be among Germany’s biggest listings and Europe’s largest since 1999.

Volkswagen’s supervisory board is due to meet on Sunday evening and will likely release details afterwards on the price range, valuation and confirmed cornerstone investors for Porsche AG, sources told Reuters on Thursday.

While the luxury car brand scores well with investors on environmental issues, aiming for more than 80% of newly sold cars to be fully-electric by 2030 from 13.6% in 2020, some are concerned over its governance.

The main issue is the fact Oliver Blume, who became the boss of Volkswagen this month, will also stay on as CEO of Porsche, raising potential conflicts of interest.

Another is the relatively small proportion of shares being offered to external investors – just 12.5% of Porsche’s total capital – which would leave them with little influence.

Ben Ritchie, head of European equities at investment company abrdn, said Porsche was “definitely something we’ll have a look at, but we’ll have to go away and give the governance a really good think”.

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

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

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

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

Georg Kell, head of Volkswagen’s independent sustainability council, defended the decision for Blume to stay as Porsche CEO.

“If an outsider came to rattle things and set a new course, that would rather be a disturbance,” he said.

BEST (NYSE:) PRACTICE

Estimates of Porsche’s valuation vary widely. HSBC analysts this week put the price tag at 44.5-56.9 billion euros, but a source close to the listing said it was more likely to be 70-80 billion euros.

Among Porsche’s listed rivals, Ferrari (NYSE:)’s market capitalisation is 36 billion euros, while Mercedes Benz is worth just under 62 billion euro.

“As a result of the capital and management structures, there is the potential for conflict of interest within governance,” said Richard Hilgert, senior equity analyst at Morningstar.

“Some investors may be constrained by ESG guidelines from owning Porsche AG,” he added, though he said the offering could be attractive to investors who focus less on such issues.

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

“Governance best practice is for the management board to only have one executive position to ensure their focus and to avoid conflicts of interest,” Chan said.

He also noted a low proportion of independent directors at the company, which will remain heavily influenced by Volkswagen and its main shareholder, Porsche SE.

“While we try to engage with companies to improve their governance … it’s difficult to see Porsche SE/VW/Porsche AG acquiescing to any of these moves to best practice (possibly separate CEOs, in time), so investors need to be mindful of them in deciding how much it affects the attractiveness of the shares for them,” Chan said.

Gilles Guibout, head of European equity strategies at AXA Investment Managers in Paris, said he was concerned about the fact that only preference shares would be issued, which don’t have voting rights.

“This means minority shareholders will have no rights,” he said.

Andrea Scauri, senior portfolio manager at Volkswagen investor Lemanik Asset Management in Milan, also pointed to the small proportion of shares being offered as a potential deterrent.

“There will be so few shares on offer, I hardly think they are going to give shares to me.”

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