Strangle Herbie

By Alexis Xydias

Nov. 28 (Bloomberg) -- Porsche SE, which earns more through derivatives than by selling cars, may run into difficulties stemming from the options strategy that helped it build its stake in Volkswagen AG, analysts said.

Porsche’s tactic is a “daunting mix of risk and reward” that may force it to buy Volkswagen shares if they fall toward 200 euros, leaving the maker of the 911 sports car highly indebted, Citigroup Inc. said in a report dated yesterday. Separately, Sanford C. Bernstein Ltd. said Porsche faces “material” risk should Volkswagen shares near 242 euros.

Analysts have speculated that Porsche has financed the acquisition of calls by selling puts, which would force the carmaker to buy VW shares if the contracts are exercised. Porsche said earlier this month that its Volkswagen options bets produced a gain of 6.83 billion euros ($8.8 billion) in the last fiscal year. The company made 1 billion euros from selling vehicles.

Are Porsche’s management “the smartest guys in the room” or “in trouble?” wrote Max Warburton, an analyst at Bernstein in London, in a note today. “In our view, Porsche is still in control, but possibly at considerable risk until the put options apparent in its balance sheet expire by July 2009.”

A call option gives the holder the right to buy an underlying security at a given price and by a set date, while a put gives the holder the right to sell. Porsche said Oct. 26 that it had acquired cash-settled calls equivalent to 31.5 percent of Europe’s biggest carmaker, an announcement that caused Volkswagen shares to more than quadruple.

‘Full Control’

Porsche shares fell 2.62 euros, or 4.8 percent, to 51.68 euros as of 1:04 p.m. in Frankfurt. Volkswagen dropped 3.46 euros, or 1.2 percent, to 291.54 euros.

Stuttgart-based Porsche “seems to need full control of the Volkswagen share price to extricate itself without cost from its huge apparent put liabilities, which appear to become onerous” if VW stock approaches the estimated strike price of 200 euros, Citigroup analyst John Lawson wrote.