Porsche To Profit From Volkswagen Squeeze

LONDON - After triggering a near-tripling of Volkswagen's share price over the past two days, Porsche could be in for a windfall: the automaker said on Wednesday it planned to cash in some 5.0% of its indirectly-held Volkswagen stake in order to give red-faced short-sellers some room to breathe.

The announcement seemed to do the trick: shares of Volkswagen (other-otc: VLKAY - news - people ) almost halved during early trading in Frankfurt on Wednesday, falling 44.2%, or 417.71 euros ($534.25), to 527.20 euros ($674.29). Volkswagen's shares still have a long way to go, though: they were trading at 212 euros ($271.15) last Friday, while analysts have estimated the stock's fair value at closer to 100 euros ($127.90).

"Porsche SE intends--depending on the state of the market--to settle hedging transactions in the amount of up to 5.0% of the Volkswagen ordinary shares," the company said in a press release on Wednesday.

The huge rise in demand for Volkswagen shares came after Porsche (other-otc: PSEPF - news - people ) disclosed its indirect, 31.5% stake in Volkswagen over the weekend, which it had built up via cash-settled options. When added to Porsche's 42.6% direct stake, and the state of Lower Saxony's 20.0% holding, investors who were shorting Volkswagen suddenly realized that there was only 5.0% of equity left with which to close their positions, or reverse their bets that Volkswagen's shares would fall. Volkswagen's shares skyrocketed on Monday and Tuesday as a result. (See "Volkswagen Soars, Scrambles The Market.")

The winner in all this would seem to be Porsche, which could end up making a tidy packet from the two-day jump in Volkswagen's share price. It is impossible to tell exactly at what price Porsche built up its indirect 31.5% stake in Volkswagen, which it hopes to use as a springboard for a full takeover. Between 2006 and early 2008, when rumors had emerged of Porsche's takeover plans, Volkswagen shares traded between 50 euros and 150 euros ($64.08 and $192.23).

"Porsche has many opportunities with their options," said Robert Heberger, an analyst with Merck Finck. "They could just cash in the money without buying the shares, and this would give them billions of gains with their options, which they can hold in cash."

Porsche was unrepentant on Wednesday, denying all responsibility for the recent market distortions and short-seller squeeze. It added that it had done nothing illegal, that it had not dabbled in the market over the past two days and that allegations of price manipulation were "without any foundation whatsoever."

But while Porsche is legally covered, it remains to be seen whether the ethical and moral consequence of building up a huge stake in a company without having to disclose it will be treated kindly by regulators. Britain's financial supervisory authority changed the rules concerning indirect cash-settled options stakes earlier this month, requiring disclosure on a par with direct stakes.