Volkswagen Group needs cash - some analysts says up to 40 billion euros - to fund the fallout of its diesel emissions crisis.
The automaker, which on Tuesday announced it will reduce investment spending at its core VW brand by 1 billion euros ($1.1 billion) a year, has said all planned investments throughout the group are up for review. Anything that is not critical will be postponed or axed, according to new VW Group CEO Matthias Mueller.
So how could the company bolster its financial firepower without cutting too deeply into the group’s current portfolio of vehicle lines and powertrains?
Fortunately VW's balance sheet is huge, listing assets worth 374 billion euros at the end of June. The group holds interests in hundreds of companies big and small, everything from its wholly-owned seating manufacturer Sitech to an indirect stake in an airport in Gyor, Hungary.
A good start is September’s liquidation of VW's 20 percent Suzuki stake ordered by an arbitration tribunal, which should result in third-quarter proceeds of around 3.4 billion euros (not to mention a tidy capital gain given it cost roughly 1.7 billion when purchased in January 2010).
Low hanging fruit
Mueller has warned cuts needed at the automaker "will not be painless." But what kind of low hanging fruit could he find before he has to make hard decisions about the fate of brands such as Bugatti.
Volkswagen has stakes in two German engineering service contractors - Bertrandt and IAV.
VW’s Porsche brand owns 29 percent of Bertrandt, which is worth about 300 million euros. Porsche classifies the stake as a financial investment in which it exercises no influence.
IAV, which among other areas develops complete exhaust-gas aftertreatment systems for diesel engines, may want to distance itself from VW, its 50 percent parent, perhaps by more closely aligning with co-owners Continental and Schaeffler.
Either of these companies could go, if not both.
VW could also sell its stake in SGL Carbon, a company in which it holds 9 percent. About 140 million euros of capital is tied up in a company in which it has no boardroom influence and in which BMW heiress Susanne Klatten holds a blocking minority to protect her own carmaker’s cooperation in the field of carbon fiber for the i3 electric car.
A lot of attention has been given to VW’s footballing interests. But selling the carmaker’s FC Wolfsburg soccer club would not generate any interest, especially since the club has a notorious reputation for fairweather fans who don’t travel with the club to support it even during this season’s Champions League matches.
Instead VW could easily sell Audi’s 8.3 percent in Bayern Munich, Germany’s topflight soccer club and perennial Bundesliga powerhouse, last valued at around 110 million euros.
Landing the stake in 2009 was considered a coup since Munich-based BMW was a more natural candidate. Audi sponsors an annual soccer cup tournament, but while glamorous, its stake in a crisis of this magnitude is only really nice-to-have. Adidas, which also has a Bayern Munich stake, might be interested in buying Audi’s shares.
Now the more problematic decision. VW has long pledged not to break up MAN, which is part of the company's truck group that was former chairman Ferdinand Piech's pet project. VW bought MAN, a German industrial conglomerate, for its core commercial trucks business. But tough times call for tough measures and there are parts of MAN that VW definitely does not need.
VW should mandate an investment bank to find a buyer for MAN’s Power Engineering business, which generated 3.3 billion euros in revenue last year and a 6.3 percent profit margin from the manufacture of massive diesel engines for ships along with turnkey powerplants. Based on trailing price-earnings ratios used for peer Wartsila, this business alone could be worth over 3.5 billion euros.
It also should sell MAN’s 76 percent stake in gear and transmission specialist Renk, a much smaller firm with only half a billion euros in revenue, but highly profitable with an 15 percent operating margin.
This additional fund raising would amount to about 4 billion to 5 billion euros. This might not sound like a lot but would bolster the automaker's financial firepower alongside likely moves such as cancelling the 1.4 billion euros paid out to ordinary shareholders largely locked up among Porsche SE, Lower Saxony and Qatar. (Non-voting shareholders will need to receive something given their preferential status as quasi-creditors, but there is no reason why they should not see a substantial reduction of their near 900 million euro payout)
Mueller may however feel the need to resort to more radical measures, if only to take advantage of the alibi the crisis provides to shrewdly clean house of former management's pet projects. If so the trucks business would be a much more attractive asset for an IPO once it no longer has Power Engineering and Ren, since investors value pure-play business models higher than conglomerates. Selling off the trucks business doesn't seem necessary at the moment, since the group already expected to generate over 36 billion euros in excess cash through 2019, or over 7 billion per year under an investment plan passed last year.
To grow an even bigger cash cushion, Mueller could trim some of the 4.6 billion in annual capital expenditure earmarked largely for upgrading and expanding its production capacity without ever touching funds destined for its model pipeline.
VW Group took the first step by announcing on Tuesday investment savings at the VW brand, its largest unit by revenues. The big news? VW remains committed to the diesel in North America and the much-maligned Phaeton will live on as an electric car. In fact, VW will develop a new modular electric architecture dubbed MEB for compact cars and light commercial vehicles. So just how existential can this crisis really be?