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9 October 2015
Whilst the Volkswagen (VW) scandal is no longer new news, it isn’t an issue that’s going away.
With their global reach and influence, it’s unlikely that it will any time soon.
I have written a detailed analysis of how I see things that you can read by visiting our Research and Analysis section by clicking here, but for those with a little less time on their hands, or that wanted the summarised version I’ve done so in the following article.
Also, for a very good, concise explanation of the ins and outs of the scandal, I’d suggest reading the BBC’s summary here.
Before “Diesel-Gate”, VW was facing a slowdown in emerging market demand and a stale product line up. VW is the global no 1 automaker with 12 brands but its reach is uneven.
The total potential “Diesel-Gate” cost is difficult to estimate as these are global liabilities. A key issue is the timing of liabilities, whether or not these can be stretched out and for how long.
Car recalls, customer redress/ compensation are the most immediate task and the cost will likely be mostly a 2016 expense. In our view the €6.5bn VW provision comes within our recall cost estimate and is realistic. However customer redress is harder to figure in terms of what precisely VW will have to offer to obtain regulatory sign off.
Regulatory/ state/ governmental fines might be determined quickly given VW’s early liability admission. It is possible that the US and EU will determine fines over the course of the next 12-18 months. Settlement speed may be a factor in VW’s favour as it can argue it has “come clean” by admitting fault early on and getting a discounted “early bird” settlement. However the quantum of damages remains highly uncertain.
Legal claims and class action lawsuits is a concern. This area has the most potential to drag on and the most cost variability. This cost centre is the most unquantifiable in the United States.
VW ended 2014 with €90.2bn of balance sheet equity and €261bn of liabilities hence has gone into “Diesel-Gate” with relatively high 74% gearing (unlike BP whose gearing was c.20%). This crisis will be more of a test for VW in terms of avoiding a rights issue than it was for BP. The positive from our review is the finding that the VW’s short-term expenses can be met from internal sources without the need for shareholder dilution. There are many financial levers VW can pull in the next 12 months. Whether VW can avoid tapping shareholders entirely is a moot point that will depend on claims/ other legal entanglements.
Assuming VW did organise a rights issue, it is possible its dual share class structure might not survive as new investors are likely to want voting stock hence diluting the controlling shareholder. It is possible a rights issue of around €10bn-€15bn to replenish cash balances/ meet liabilities will be required over the next 12-24 months. This is possible for VW, given market capitalisation of c€53.4bn. It is also possible that VW goes the bond route or some combination of the two.
It took around 4 years for BP to get to a totally reliable cost estimate for Macondo, we mention this as a possible reference point for VW. This is an unquantifiable liability hence the precise impact on profits and dividends are so uncertain as to make the valuation purely speculative at this stage.
VW is likely to survive “dieselgate” albeit in a weakened state, with liabilities crystallising over the next 2-24 months. The Board approach has been measured so far. We would stress this is a fast moving situation in which liability evolution will be closely watched. Due to these material uncertainties we feel it inappropriate to comment on the valuation.
We will continue to monitor events as they unfold and publish any updates that we feel shed further light on the future for Volkswagen, as well as the automotive and diesel industries as a whole.
Let us know what you think could be the next key development in this scandal. Leave your comments below.