German Regulator Looking Into Volkswagen Trading After Surge

By Alexis Xydias

Oct. 28 (Bloomberg) -- Germany's financial-markets regulator is looking into trading of Volkswagen AG shares after Porsche SE's plan to raise its stake in the automaker triggered a fourfold increase in two days.

BaFin is monitoring Volkswagen and hasn't started a formal probe, said spokeswoman Anja Engelland. The gains follow Porsche's Oct. 26 announcement that it plans to increase the stake in Volkswagen to 75 percent. The move forced short-sellers to cover their bets on a decline in the stock.

Volkswagen, Europe's biggest carmaker, is the most shorted stock in Germany's benchmark DAX Index. The so-called short squeeze today pushed the value of Wolfsburg, Germany-based Volkswagen's common shares as high as 296 billion euros ($370 billion), more than Exxon Mobil Corp.'s $343 billion at yesterday's close in New York, according to data compiled by Bloomberg.


``The regulator needs to investigate,'' said Piers Hillier, head of European equities at WestLB Mellon Asset Management U.K. Ltd. in London. ``The bigger question has to be why they have not done so already. If ever there was an example of market manipulation, this is it. Porsche's stake-building process is at best obscure.''

The gains follow Porsche's Oct. 26 announcement that the maker of the 911 sports car plans to increase its Volkswagen holding from 42.6 percent, spurring short-sellers to buy from a shrinking pool of stock to close their positions. Volkswagen is the world's 16th-largest company by sales, data compiled by Bloomberg show.

No Formal Inquiry

BaFin is analyzing trading in Volkswagen stock, though it hasn't opened a formal inquiry into whether there's any manipulation and ``pure cash-settled options do not require disclosure'' under the country's laws, said Engelland, a spokeswoman for the Bonn-based agency. Results from any analysis are unlikely this week, she added.

Michael Brendel, a Volkswagen spokesman, said the company doesn't comment on its stock price. Frank Gaube and Frank Scholtys, spokesmen for Stuttgart, Germany-based Porsche, didn't immediately respond to two messages left at their office or to a message left on Gaube's mobile-phone voicemail seeking comment.

About 12.9 percent of Volkswagen's common stock was on loan as of Oct. 23, mostly for short sales, the highest proportion of any company on the DAX, according to London-based Data Explorers.

`No Limit'

``One of the biggest risks with the herd mentality approach to shorting is that a lot of money can be made on the outset,'' said Ed Oliver, a senior business consultant at Spitalfields Advisors, a London-based firm specializing in securities lending. ``But you can end up losing the whole of it when you try to close the position. There's no limit.''

Stuttgart, Germany-based Porsche added to an earlier 35 percent stake and said two days ago that it holds options for another 31.5 percent. Volkswagen rose as much as 485.01 euros today, or 93 percent, to 1,005.01 euros and was trading at 790 euros at 1:52 p.m. in Frankfurt.

``Porsche heads for a domination agreement and triggers a short-squeeze,'' Horst Schneider, an HSBC Holdings Plc analyst in Dusseldorf, Germany, wrote in a report yesterday, in which he upgraded Volkswagen's common shares to ``neutral'' from ``underweight.'' The stock ``will be more driven by covering of short positions rather than by fundamental valuations.''

Carmakers worldwide are struggling with plunging sales as credit markets seize up and economies contract, deterring consumers from making large purchases. U.S. industry-wide auto sales fell 27 percent in September, the steepest monthly slide since 1991, while nine-month deliveries in Europe declined 4.4 percent as September sales dropped 8.2 percent.

Carmakers' Debt Downgraded

PSA Peugeot Citroen, Europe's second-largest carmaker, and smaller French competitor Renault SA both had their credit ratings downgraded by Moody's Investors Service because of the risk that car markets won't recover next year. Standard & Poor's said it may cut the credit rating of Fiat SpA, Italy's biggest carmaker, to less than investment grade.

Until yesterday, when the stock more than doubled, Volkswagen's largest gain in almost two decades was a 27 percent jump on Sept. 18. People familiar with securities lending said at the time that the collapse of Lehman Brothers Holdings Inc. caused the increase by triggering recalls of borrowings. The stock fell 23 percent on Oct. 20, the steepest drop also in almost two decades, as short-sellers predicted the price would decline once Porsche gains control.

Lower Saxony

There may be little ordinary stock freely trading in Volkswagen because most of the shares are owned by Porsche, the German state of Lower Saxony and the banks that underwrote Porsche's options, Adam Jonas, a London-based analyst at Morgan Stanley, wrote in a research report yesterday. Lower Saxony is Volkswagen's second-largest owner with a 20.1 percent stake.

Index-tracking funds also hold stakes in Volkswagen, now the DAX's most heavily weighted stock, and must retain the holdings as long as the carmaker remains a member.

Deutsche Boerse AG, the operator of Germany's main stock markets, said Volkswagen will remain in the DAX unless the carmaker announces the freely traded stock no longer meets requirements.

``We're applying our regulatory framework and, as long as Volkswagen's free float is above 5 percent, the index won't be changed,'' said Torsten Baar, a spokesman for Frankfurt-based Deutsche Boerse.

Porsche's Intent

Until Oct. 26, Porsche had said it was aiming only for a stake exceeding 50 percent, and Chief Executive Officer Wendelin Wiedeking said at the Paris Motor Show early this month that a stake of as much as 75 percent would be ``not realistic'' because of market turmoil.

Short sales have largely been undertaken by investors betting on a decline in Volkswagen's common stock, which hold voting rights, or its underperformance relative to the preferred shares, which carry no votes, according to analysts.

The common shares, which outnumber the preferred equity almost three to one, are the only stocks to gain this year on the DAX and the nine-member Bloomberg Europe Autos Index. In contrast, Volkswagen's preferred stock has dropped 61 percent.

``Volkswagen has been one of the greatest shorts of hedge funds, and it's been an absolute, absolute disaster,'' Emmanuel Roman, co-chief executive officer of GLG Partners Inc., said at a conference in London on Oct. 23. ``It's been very painful.'' GLG didn't participate in short-selling trading of the carmaker's common shares, he said.

To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net;