DBRS Comments on Volkswagen’s Partnership with Suzuki

DBRS notes that Volkswagen AG (VW or the Company, with an Issuer Rating of A (low)) recently announced that it had reached a framework agreement (the Agreement) to establish a close long-term strategic partnership with Suzuki Motor Corporation (Suzuki). Under the Agreement, VW is to acquire 19.9% of Suzuki’s issued shares for an aggregate amount of approximately YEN200 billion (EUR1.7 billion equivalent). In turn, Suzuki will invest approximately one half of the amount received from VW into shares of the Company. The Agreement remains subject to approval of the relevant authorities with the transaction expected to close in January 2010. DBRS notes that the Agreement would moderately bolster VW’s business profile as it would further increase the Company’s geographic scope and product portfolio. Additionally, VW’s financial profile is expected to remain consistent with the currently assigned ratings, which are therefore unaffected by the Agreement.

The Agreement stands to improve the Company’s geographic diversification, with Suzuki having a solid presence in India, Japan and Southeast Asia; thereby complementing VW’s strong market position in China. Additionally, the Company’s product portfolio will also be expanded as Suzuki specializes in minicars, which remains a vehicle segment where VW is not highly represented. Suzuki, in turn, will particularly benefit from access to VW’s advanced powertrain technologies, with both companies standing to take advantage of considerable synergies primarily in the form of reduced development and purchasing costs resulting from the partnership. The Agreement is consistent with trends in the automotive industry, where the combination of overcapacity and higher development costs (primarily attributable to increasing environmental and fuel-efficiency regulations) have prompted several original equipment manufacturers (OEMs) to either acquire other companies or enter into strategic alliances with other OEMs in order to attain the requisite scale to remain competitive. DBRS observes that the recent global economic crisis and automotive downturn would appear to have served as catalysts with respect to this automotive consolidation given the increasing financial constraints imposed on many OEMs.

DBRS notes that the Agreement with Suzuki follows VW’s recent EUR3.9 billion acquisition of a 49.9% stake in Porsche AG (Porsche) that, through a series of transactions to be executed through 2011, is expected to eventually culminate in a merger of the Company with Porsche Automobil Holding SE (Porsche SE), which is the holding company of Porsche. (For details, please see DBRS’s press release dated August 18, 2009.) As of September 30, 2009, the Company’s industrial operations had a net liquidity position of EUR13.4 billion, with VW also planning a capital increase of up to a maximum of 135 million new non-voting preferred shares (valued at EUR63.6 per share as of December 9, 2009) in the first half of 2010. VW’s financial profile should therefore be able to withstand both the Suzuki and Porsche transactions while remaining commensurate with the Company’s currently assigned ratings.

Notes:
All figures are in euros unless otherwise noted.

The applicable methodology is Rating Automotive, which can be found on our website under Methodologies.

This is a Corporate (Autos & Auto Parts) rating.