Porsche SE, the majority shareholder of Volkswagen AG, announced a potential impairment charge of up to €20 billion on its VW stake. This reflects the impact of Volkswagen’s ongoing cost challenges and declining investor confidence. The German automaker is grappling with rising expenses, intense competition from Asian rivals, and protracted labor disputes concerning plant closures and potential wage reductions.
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Volkswagen’s Cost Crisis Impacts Porsche SE’s Valuation
Volkswagen’s financial struggles have significantly impacted Porsche SE’s investment. The holding company, which controls 31.9% of Volkswagen’s equity and 53.3% of its voting rights, estimates the write-down to range between €7 billion and €20 billion. This starkly contrasts with the current market value of the stake, approximately €14.3 billion based on Volkswagen’s market capitalization.
The ongoing negotiations between Volkswagen and its unions regarding cost-cutting measures at German facilities have prevented the automaker from finalizing its financial planning for the year. Consequently, Porsche SE has been compelled to rely on analysts’ projections for its own financial forecasting.
In addition to the potential Volkswagen write-down, Porsche SE anticipates an impairment charge of €1 billion to €2 billion on its 12.5% stake in luxury carmaker Porsche AG. The company attributed these estimated impairments to a confluence of factors, including heightened market uncertainty, weaker than anticipated demand in various markets, escalating geopolitical tensions, and rising protectionist sentiments.
Porsche SE Revises 2024 Outlook
In light of these challenges, Porsche SE has revised its financial outlook for 2024. The company now projects a “significantly negative” group result after tax, withdrawing its previous forecast of €2.4 billion to €4.4 billion. Despite this, Porsche SE still intends to distribute a dividend for the fiscal year.
Volkswagen’s dividend, a crucial source of cash flow for Porsche SE, is projected to decrease to €6.75 from €9 last year, according to LSEG estimates. This reduction follows a significant decline in Volkswagen’s earnings during the first nine months of 2024, down by a third compared to the previous year. Union representatives are urging Volkswagen’s management to implement further dividend cuts to mitigate costs. However, the CFO recently reaffirmed the automaker’s commitment to maintaining a payout ratio of at least 30% of earnings after tax.
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Financial Stability Concerns Loom for Porsche SE
Analysts caution that the combined pressures of pricing competition, reduced dividends from Chinese joint ventures, and ongoing investment commitments could result in Volkswagen’s free cash flow approaching zero in the coming years. This poses a significant threat to Porsche SE’s financial stability. The evolving situation warrants close monitoring as Volkswagen and Porsche SE navigate these complex challenges. The magnitude of the potential write-down underscores the severity of the issues confronting the German automotive industry.
