Volkswagen AG, Dieselgate and a planned 2019 IPO

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| The European | 16 October 2018

All big auto-makers have had their share of disasters. Faulty ignition, brakes, airbags, seat belts and other technical issues have resulted in recalls of thousands of cars. However, the biggest scandal of recent auto-history is linked to Volkswagen AG. Dubbed as “Dieselgate”, this fraud committed by Europe’s largest automaker rocked the foundations of the auto industry and has attracted claims and penalties of around US $ 35 billion, with more to come.

Dieselgate

On September 18, 2015, the US Environmental Protection Agency (EPA) reported that VW had installed illegal “defeat devices” in hundreds of thousands of 2.0-litre engines in the United States since 2009.

The software used in the Volkswagen, Porsche, Audi, Seat and Skoda brands helped make the cars meet exhaust pollution standards when monitored in tests, but in real life, their emissions exceeded the limits (Up to 40 times more than legally allowed).

The exhaust control equipment in the VW diesels was programmed to shut off as soon as the cars rolled off the regulators’ test beds, at which point the tailpipes spewed illegal levels of two types of nitrogen oxides into the atmosphere, causing smog, respiratory disease, and premature death.

VW CEO Martin Winterkorn stepped down (23 September 2015) five days after the scandal broke in 2015. He was replaced by Matthias Mueller. Mueller had to vacate office due to an inquiry constituted against him. He was replaced by VW Brand Chief Herbert Diess in April 2018, who is now the CEO of VW.

Extent of Damage

About 580,000 sedans, SUVs and crossovers were sold in the U.S. under the company’s VW, Audi, and Porsche marques. In Europe, 8.5 million cars were affected.

Fortune (8 September 2018) states,

“Volkswagen AG’s bill for cheating on diesel emissions could potentially top 30 billion Euros (US $35 billion)”.

Initially, VW had to face the courts in the USA. Now, it is feeling the heat in its own home, Germany.

DW (13 June 2018) states,

“Volkswagen is also facing fines or investigations from 19 other countries, including the US, Canada, India, Brazil, China and Australia.”

Latest News

Reuters (8 October 2018) reported,

“Volkswagen is close to hiring Citigroup, Deutsche Bank, Goldman Sachs and JP Morgan to help with the potential stock market listing of its truck unit Traton”.

Last month (September 2018) VW management issued two interesting statements (related to this news).

“VW plans to convert Traton’s legal structure to a Societas Europaea (SE) and to shortly mandate investment banks and legal advisers for a possible initial public offering”.

“Traton should (by year-end) be in shape for a potential stock market listing, which is expected to take place in mid-2019.”

Earlier this year (2018) Traton’s CEO said,

“Volkswagen is targeting proceeds of more than 6 billion Euros (US $7 billion) with a potential listing of its truck and bus subsidiary”.

Purpose of fundraising through IPO

VW has plans to build a global trucks business by integrating its “MAN” and “Scania” divisions to challenge rivals Daimler and Volvo.

Keeping in view the troubles of VW, the plan seems to be over-ambitious. However, if we take a closer look at the financials of “MAN” and “Scania”, it looks that the automaker might strike gold with this synergy.

Financials – MAN Truck and Bus Company

Financials – Scania:

 

The financial data of both, MAN and Scania demonstrate that the businesses of these companies are moving on an upward trajectory. It makes perfect sense that if these businesses are integrated and VW “smartly” utilises funds raised from the IPO, VW will be in a position to reclaim its lost glory.

 

VW also owns a 16.85 percent stake in Navistar, a U.S. truck maker. Throughout the year 2018, the business markets were filled with rumours that VW might completely takeover Navistar. Navistar’s “consolidated net revenue for the year 2017” stood at US $8.57 billion.

 

A complete takeover of Navistar by using funds raised from the IPO will be the coup of the decade for VW.

 

Future Outlook

 

At the moment, there are only talks about the 2019 IPO of Traton. The EU bloc has been under economic pressure created by the ever-changing geopolitical situation. Dieselgate is still a fresh wound for VW. The possibility of additional claims and liabilities resulting from dieselgate exists.

 

Due to the above factors, the success of the planned IPO cannot be guaranteed at this stage. If the legal battles of VW attain clarity in 2019 and confidence of investors in the EU’s economy strengthens, then VW will be suitably placed to become the global leader in the automotive industry.

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