LONDON: Breaking up is hard to do, so Volkswagen's new boss Herbert Diess may opt for a fudge. There's value hidden in the 87 billion euro carmaker, but a plan to float a small part of its truck unit may not release much of it.
The German group is planning to list Volkswagen Truck & Bus - whose main businesses are Sweden's Scania and Munich-based MAN - in early 2019, Reuters reports. That could boost Volkswagen's depressed share price by capitalising on the higher rating investors typically give truck manufacturers compared with carmakers.
VW's market capitalisation is about 87 billion euros. Throw in 33 billion euros of pension liabilities and minority interests, take off cash, and its enterprise value is around 97 billion euros. That's a paltry 2.7 times the EBITDA it is expected to generate this year, according to Eikon. Truckmakers like Volvo and Paccar trade at around 9 and 11 times EBITDA respectively.
That's probably too high a multiple for VW's truck business, which is less profitable than peers. But with a 25 percent discount, or 7.6 times forward EBITDA multiple, the unit would be worth 25 billion euros including debt. Assume the rest of VW keeps the same 2.7 times multiple, and the two businesses would be worth 113 billion euros including debt after the float, handing shareholders a 16 billion euro gain.
However, VW may give away much of the upside by insisting on keeping at least 75 percent, as reported by Der Spiegel. That means shareholders in the new unit will not benefit from a control premium. Markets may also be put off by Volkswagen's messy governance if it has too big a say in the truck unit. VW's supervisory board is stuffed with union bosses and local politicians.
VW's fellow investors in MAN and US truck partner Navistar International are another concern. It might make sense to buy them out before the spinoff, but shareholders including Carl Icahn may want a hefty premium. Lastly, as fellow German behemoth Siemens found after floating its healthcare business, partial listings can still leave the parent group stuck with a conglomerate discount.
Diess could go further. He could sell assets like Ducati, or even list VW's luxury brand Porsche. It could be worth 100 billion euros as a standalone business, analysts at Evercore ISI reckon. As things stand, VW's truck listing may be a missed opportunity.
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