Volkswagen may sell a 10 percent stake worth 1.6 billion euros to Abu Dhabi and gain a second strategic shareholder as Brussels turns up the heat on a law protecting Europe's largest carmaker from take-overs.
Chief Executive Bernd Pischetsrieder told VW shareholders on Thursday that the emirate, which is joining forces with VW and another partner to buy Europe's leading car fleet management business, was interested in buying a stake in the automaker.
VW said late on Wednesday the partners would pay two billion euros ($2.36 billion) to buy LeasePlan NV from Dutch bank ABN Amro, with VW holding 50 percent, Abu Dhabi's state-owned Mubadala Development Company holding 25 percent and the Saudi-owned Olayan Group holding the remaining 25 percent.
Sources close to the transaction said VW could sell the 13.3 percent voting stake it holds in its treasury - equivalent to 9.97 percent of issued capital - to Abu Dhabi, raising more than enough to finance its share of the purchase.
Pressure from the European Commission on Germany to scrap a law that gives VW's home state effective control with a voting stake of 20 percent may encourage VW to raise funds by selling the shares to Abu Dhabi rather than returning them to shareholders or using them to back a convertible bond issue.
"VW is not being driven by this thought but it will have been at the back of people's minds. If VW wants to raise cash why not sell the treasury shares to a reliable partner," said one source close to the deal.
The LeasePlan deal, one of the biggest acquisitions in VW's history, will bring the German car giant control of a firm that posted 2003 net profit of 193 million euros and that is a steady source of demand for its vehicles.
VW shares gained 0.5 percent to 38.3 euros by 1146 GMT, lagging a one percent gain on the Dow Jones Stoxx European autos index.
STABLE PARTNER: Should Volkswagen sell just enough shares to raise the one billion euros it needs for the deal, Abu Dhabi, one of the largest of the United Arab Emirates, would still become the company's second biggest shareholder behind the state of Lower Saxony and ahead of US fund Brandes Investment Partners.
"This (state investment) company, and thus Abu Dhabi, would constitute a reliable and long-term oriented investor who is familiar with and shares the stated goals of the Volkswagen Group, and who, we believe, would also be a stable partner," Pischetsrieder said.
Ownership is a sensitive issue at former state-owned Volkswagen. When Germany sold its majority stake in VW in 1960, it simultaneously passed the "VW Law" that prevents any investor exercising more than 20 percent of its voting rights.
The law, which has effectively prevented any take-over, has been repeatedly under attack by the European Commission, which views it as a hindrance to the free flow of capital.
VEHICLE SALES RISE: During the AGM, Pischetsrieder did not comment on the company's first quarter earnings performance, but said that the group sold a total of 1.2 million vehicles during the period, a rise of 0.6 percent on the year.
He also reaffirmed his target of reporting an operating profit of more than 2.5 billion euros ($2.95 billion) before special items in the full year 2004.
Sources close to the LeasePlan deal said ratings agencies viewed the transaction as positive. Standard & Poor's, which last month put VW's A long-term rating on review for possible downgrade, declined to comment ahead of a statement due later.
But Maria Bissinger, director, corporate ratings at S&P in Frankfurt, said the review focussed on the operating business.
"VW needs an improvement in its industrial performance," she said.
VW was advised by Morgan Stanley and Citigroup on the LeasePlan acquisition.