Ladies and gentlemen, start your engines: Porsche Dual-Class IPO goes smoothly

The IPO of luxury car maker Porsche went off without a hitch late last month. The maker of the sporty 911 has raised 9.4 billion euros ($9.2 billion), with the 911 million shares it issued rising to 86 euros per share from the IPO price of 80.50 euros in its trading debut in Frankfurt, reaching the company’s value at its peak – trading close to market capitalization parity with its parent company Volkswagen, which also includes Audi, Bentley and Lamborghini in its portfolio. Under the offer, Volkswagen will retain a majority stake in the luxury brand, which after listing became the fourth-largest automotive company by valuation after Volkswagen, Toyota and Tesla.

Marking Europe’s biggest IPO in over a decade, Volkswagen offered Porsche in a two-class assembly. The offer allows the Porsche and Piëch families to retain direct control and ownership of the automaker through a financial holding company. The entity, Porsche Automobil Holding SE, is also the majority shareholder of Volkswagen with a stake totaling more than 53% of the outstanding shares.

Sudhir Roc-Sennett, head of thought leadership and ESG at Vontobel Asset Management, said the Porsche offering differs from some of the tech IPOs that have also had two-stock classes. “While family-controlled European businesses, whether LVMH or Remy, have performed extremely well of late, with a fully integrated subsidiary, the IPO makes the offering very different,” Roc-Sennett said. .

The IPO includes a structure consisting of 12.5% ​​floating IPO. The plan calls for Volkswagen to sell 25% of its stake in Porsche, with that equity split between non-voting preferred stock and voting common stock, with the caveat that only the family holding company bought shares. voting shares in the new issue.

Porsche’s revamped capital structure includes 50% equity divided into non-voting preferred shares and 50% voting common stock, replicating Volkswagen’s two-class share structure, where 59% of equity are in common shares with voting rights and 41% in preferred shares. share that does not have a voting component.

Roc-Sennett commented on the structure of the deal saying, “these companies aren’t separate, in the case of Volkswagen and Porsche there’s a much closer relationship than say Fiat and Ferrari, it’s one company much more integrated.

The class structure, along with some governance issues, raised concerns that the IPO could be undersubscribed due to the lack of Democratic shares, although Roc-Sennett said, “The dual class structure action had no impact on subscriber demand. The negatives are outweighed by some serious supporters. The company is in a mega demand cycle, with a luxury brand, and it’s a premium works sports vehicle, but not quite Ferrari. It was the right time for the family to offer the spin-off, as the market still appreciates Ferrari as well as other peer automakers.

Volkswagen plans to use funds raised from the IPO to invest in software and electric vehicle products as the auto industry takes center stage in the global energy transition. The company predicts that 80% of the total cars produced will be electric vehicles by 2030.

Roc-Sennett said: “The Porsche IPO is unusual because none of the new money raised went to the new entity that listed itself.” In December, Volkswagen will hold a shareholder vote on a special dividend that could see up to 49% (4.7 billion euros) of the proceeds from the IPO going to shareholders of parent company Volkswagen.

The IPO is the largest in Germany since the IPO of telecommunications service provider Deutsche Telekom in 1996. The offering comes after Porsche had a record year in 2021. In 2021, sales of the Taycan all-electric models have overtaken the classic 911 model, as Porsche has sold more than 300,000 cars worldwide. As underwriters of the IPO were public investment funds from Qatar, Norway and Abu Dhabi. T. Rowe Price declined to comment on his participation in the IPO.

Previously, the transferability of voting rights through shareholding constituted the underlying value of a company’s shares. However, over the past decade, participants have seen Wall Street become much more supportive of two-class structures.

In 2017, Snap Inc., parent company of the Snapchat mobile app, offered with only non-voting shares. In this offering, there were three classes of shares, Class A non-voting common stock available in the offering and on the secondary NYSE, Class B reserved for executives and early investors which carry one vote, and Class C shares reserved for Snap co-founders who held 10 votes each. This structure allowed Snap’s co-founders to retain 88.5% of the voting rights after its bid.

More recently, in a vote approved by Shopify shareholders earlier this year, CEO and Founder Tobias Lütke was granted 40% of the voting rights through the creation of a new Class B share, titled the “founding” action. This special share class gives Lütke voting and governance control over the company until he decides to leave.

Another famous example of dual-class structures is News Corp. and 21st Century Fox. The dual structure of News Corp. has come under militant criticism on several occasions over the years. The two-class structure of the company allows the Murdoch family to have supernormal voting rights, controlling 40% of the voting rights while owning approximately 14% of the company.

According to data from Institutional Shareholder Services, CIO’s parent company, nearly 6% of the largest 1,500 listed US companies employ a two-class structure. A 2016 study by ISS shows that CEOs of multi-class companies receive more compensation but generally generate lower stock market returns, revenue growth and return on equity growth. Data showed that dual-class companies underperform in terms of acquisition performance and return on cash and capital expenditure.

Activist investors generally proactively adopt the principles of shareholder democracy, where a share has only one vote. As such, activists tend not to favor dual action classes that divide a company’s voting base. On the other side of the coin, companies may choose to strategize and use dual share classes to protect themselves from activist investors and attempted leveraged buyouts.

Roc-Sennett advises for multiple share class offerings that “buyers should be diligent in weighing the positives and negatives, any investor should see that their priorities align with those of the majority shareholder.” It is preferable that investors and controlling investors have the same end goals. »

Proxy advisory firms, such as ISS, recommend that the multi-tier corporate governance structure be used when an exceptional set of circumstances makes it appropriate to do so in the underlying market of the issue.

Although dual-action classes have been rolled out with varying degrees of success, concerns about Porsche persist among some investors due to the listing structure. The dual structure fails to make Porsche an independent brand, creating a governance environment that allows for group decision-making instead of letting Porsche decide what’s best for itself, potentially limiting profits and revenue in the future.

As for the future of similarly structured agreements, Roc-Sennett said that “perhaps an electric vehicle division or a battery substitute production operation could develop in the same way, although the manner in which the offer was made was inherently designed to meet the facilities required by the families that control Porsche,” he continued, “companies put these governance structures in place because you might need them one day, not necessarily because they need the structure when it is built.

By Dusty Hagedorn

Related stories:

Electric vehicle stocks will run out, predicts Arnott

Advisor to institutional investors, Ash Williams tells NYSE and NASDAQ to curb multi-stock IPOs

SEC accuses Volkswagen of defrauding bond investors

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