Porsche Posts Pre-Tax Loss of 4.4 bil. Euro in FY 2008/09 on Failed VW Takeover

The holding company which controls the assets of the Porsche sports car company has posted a full-year pre-tax loss of 4.4 billion euro (US$6.58 billion) in the company's 2008/09 financial year (FY) which ended on 31 July, according to a company press release. This represented a massive swing from the financial results of one year before when Porsche SE posted a profit before tax of 8.6 billion euro. The company stated that the primary factor in the sizeable loss was the write-down on the value of cash-settled options on the Volkswagen (VW) Group shares that Porsche had acquired as part of its failed takeover bid of Europe's largest passenger carmaker. A rise in share values on these options was also the principal reason behind the immense profits recorded in FY 2007/08, and had little to do with the company's core sports car manufacturing business. Porsche also stated that the write-down on its share options came at the end of the reporting period in question and paved the way for the sale of a substantial portion of these options to the sovereign investment fund of the Emirate of Qatar.

Cash-settled options are financial instruments in which the owner does not receive the actual share when exercising the option. Instead the owner of the option receives the difference between the cash value of the share and the price when the option is exercised. However, Porsche had to agree to relinquish its options at a discounted rate in order to ease its financial crisis and this has added to the holding company's 2008/09 FY loss. Speaking about the write-down on these cash-settled options in preparation for their sale to the Qatar Investment Authority (QIA) Porsche said in its statement that the result was "influenced by the hidden reserves and liabilities identified in the course of the purchase price allocation for the shareholding in Volkswagen."

Porsche has said that as a result of its holding in VW, "the Wolfsburg-based automotive group was fully consolidated in the consolidated financial statements of Porsche SE for the first time. In the process, the fair value of the assets and liabilities acquired in the combination was determined for inclusion in the financial statements of Porsche SE." Porsche stated at the end of July that the above factors could lead to pre-tax loss of up to 5 billion euro for the 2008/09 FY. Away from the rather abstract effect on Porsche's SE's pre-tax profits that the fluctuations in the value of cash-settled options has had, Porsche SE stated that the core carmaking business Porsche AG posted a double-digit profit on its operating margin, claiming as a result that Porsche AG remains the world's most profitable carmaking business. Porsche said in the statement that the company had drawn 1 billion euro from revenue reserves and as result is able to record a nominal net profit for distribution to share shareholders of 8.23 million euro.

Outlook and Implications

Porsche has incurred massive pre-tax losses as a result of its failed takeover bid of the VW Group which finally broke down in July this year (see Germany: July 24 2009: VW to Control Merged Automotive Group, Including Porsche). The bid broke down as a result of the sports carmaker being affected by a liquidity crisis which meant it was unable to undertake a full takeover of VW which would have seen Porsche acquiring a 75% "domination" stake in the company. Porsche SE has obviously attempted to be as transparent as possible with regards to losses incurred by the write-down on cash-settled options and warned investors as far back as July that an even bigger loss of 5 billion euro could have been anticipated as a result of the write-down. It was Porsche's decision to sell most of its remaining VW options to the QIA at a lower amount than the options were originally acquired for which triggered the write-down.