The year’s most anticipated European IPO is off to a sensational start as books quickly filled up. But the question on the market is whether speedy demand is driven by fundamentals or fear of missing out, despite lingering corporate governance concerns.
Porsche’s IPO books are oversubscribed at the top of the range, evidencing the fundamental demand at the up to EUR 75bn valuation. Sources close to the IPO, and crucially those away from it, don’t dispute Porsche’s quality as a manufacturer of high-performance luxury cars.
The company is extremely cash generative and is the most glamorous and high-profile name in Europe’s new issue market for many years.
It is likely also the only substantial IPO pricing on the continent in 2022, and therefore a key chance to clawback some gains after a terrible 2022 for stocks.
But Porsche’s clear qualities stand alongside its complex corporate governance structures, which have been flagged by investors as a cause for concern, sources on the deal concede.
The IPO is being sold as a chance for Porsche to separate from its parent Volkswagen [ETR:VOW3], but the two companies share a CEO. Also, no shareholder in Porsche, even the sovereign wealth funds cornerstoning the deal, will have a chance to dictate company strategy given only non-voting preference shares are being sold at IPO.
VW will hold 75% of Porsche voting shares after IPO and Porsche SE, controlled by the Porsche–Piëch family, will hold 25%. Porsche SE is also the controlling shareholder of VW, holding over 50% of the voting rights.
Governance speed bumps
The governance issues have been something the company has had to address throughout the IPO marketing process, two sources close to the IPO said.
Investors have broken roughly into three camps over the issue, a source said. Some don’t care at all, others have told banks that they are avoiding the IPO completely because of it – although these are a minority – and a third group has been persuaded to overlook initial reservations and back the deal.
The EUR 76.50-EUR 82.50 price range and implied EUR 70bn-EUR 75bn market cap values Porsche at a hefty discount to Italian car maker Ferrari [NASDAQ:RACE]. It is also below the top of the company’s initial EUR 85bn valuation thoughts, the source said, showing a compromise meant to offset investor concerns on governance.
“It is a range the market likes,” he said.
An investor agreed the range was “compelling” and added that the strength of the cornerstone interest from Qatar Investment Authority, Norges Investment Bank and Abu Dhabi’s ADQ alongside US investment manager T. Rowe Price would also soothe investor scepticism.
“Norges is a particularly strong statement as it’s totally outside its normal investing policy,” he said, adding that Norway’s sovereign wealth fund benchmarks to FTSE indices, which will not include Porsche shares because it does not meet minimum voting rights thresholds.
Two other investors though remained highly critical of Porsche’s governance. One added that the IPO does little to achieve a meaningful separation from VW, especially with the same CEO over both entities, compounding on the several conflicts of interest that could arise from the ownership structure.
The third investor noted the range appears to have been set by the sovereign wealth funds and wondered whether the lack of a big institutional ECM name in the cornerstone tranche was a sign that traditional long-onlies were not sold on the proposed valuation.
For many investors, however, it might be that they simply can’t afford to miss it. Despite 40% of the Porsche IPO going to cornerstones, an investment in the deal will likely be the largest single position many take this year given the EUR 9.4bn deal size, including greenshoe.
On average, European IPOs priced since the beginning of 2018 have yielded a weighted three-month return of 14%, according to Dealogic data. European new listings this year have also performed well, producing a weighted return of just under 12%, compared with a 17.3% decline in the Stoxx 600.
If Porsche were to perform in line with the market average over the last few years, a EUR 200m IPO investment, for example, would yield a profit of EUR 28m, right at the end of a year where investors have experienced battered markets.
“If you are a hedge fund, you probably have to take the chance and buy the IPO, as it is the only opportunity to gain some alpha,” said the third investor.
For many, the chance to invest in Porsche – a heritage brand and name of rare quality in the European IPO market – is enough to overlook any concerns over governance, especially as the interests of the Porsche family, which is buying 25% of Porsche AG at a premium to IPO price, are aligned with the success of both the IPO and the company.
The deal size, its German index inclusion and the profile of the company mean that for many investors missing the Porsche IPO would be as much an active call as taking part in it, said one source.
Volkswagen and Porsche SE did not respond to requests for comment.
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