Volkswagen Sells $1.6 Billion Bond to Finance New Autos

Volkswagen AG, Europe’s biggest carmaker, sold 1.2 billion euros ($1.6 billion) in debt convertible to preferred stock to finance expansion that includes new plants and a full takeover of truck unit MAN SE.

Proceeds from the mandatory convertible notes, which have a 5.5 percent coupon and mature in November 2015, will be used to fund growth, Wolfsburg, Germany-based VW said today. The sale comes as VW’s Audi division, the world’s second-largest luxury-car manufacturer, starts making its new A3 sedan at a Hungarian plant that was expanded for more than 900 million euros.

VW is setting up new production sites worldwide in such markets as China and North America and adding models to overtake General Motors Co. and Toyota Motor Corp. as the world’s biggest automaker by 2018. The German company, which already owns more than 75 percent of Munich-based MAN, is offering to buy out the truck producer’s other investors.

The bond sale “is an expensive way to raise capital,” Fraser Hill, a London-based analyst at Bank of America Merrill Lynch, said today in a research report. “Buying the remainder of MAN could consume up to 3 billion euros, although this should still leave the group well capitalized,” so investors may interpret the sale as showing “a desire to make further acquisitions” while sustaining its credit rating.

Stock Drops

Volkswagen preferred shares, the company’s most widely traded stock, fell as much as 3.1 percent to 160.05 euros, the steepest intraday drop since May 23, and were 2.7 percent lower at 3:15 p.m. in Frankfurt. The stock has declined 6.7 percent this year, valuing the company at 73.5 billion euros.

Net liquidity at VW’s automotive operation fell 32 percent to 10.6 billion euros as of March 31, the company said in its first-quarter earnings report.

“Our aim is to maintain the favorable liquidity position, the strong capital structure and our good rating in comparison with Volkswagen’s competitors,” Chief Financial Officer Hans Dieter Poetsch said yesterday in a statement.

The debt sale complements a similar financing move in November, Volkswagen said today. The earlier sale, of 2.5 billion euros in bonds that automatically convert into shares in three years, also included an annual coupon of 5.5 percent.

VW has begun construction of a factory in Changsha, China, part of a 9.8 billion-euro investment program for the country. The Volkswagen group plans to offset a contraction in the European car market by rolling out 60 new and updated models, and expanding in the premium-car segment, Chief Executive Officer Martin Winterkorn said in April.

Sedan Buyers

Audi predicted yesterday that the sedan version of the compact A3 will outsell the model’s existing hatchback and convertible variants to help narrow the gap with global luxury-car sales leader Bayerische Motoren Werke AG. The division predicts that every other buyer of an A3 will choose the sedan, Josef Schlossmacher, an Audi spokesman, told journalists late yesterday in Budapest.

The new A3 “plays a decisive role for our growth course,” Audi CEO Rupert Stadler said today at a ceremony marking the start of the sedan’s production at the brand’s plant in Gyor, Hungary. “We’re fully on track to reach our goal of selling 2 million cars by 2020 -- maybe even a few units more.”

The factory is one of the world’s largest engine-manufacturing facilities. Audi also assembles the TT sports car and A3 convertible there.

Russian Production

The Gyor expansion project more than triples the plant’s annual car production to 125,000 vehicles. The added capacity is part of Audi’s efforts to widen its manufacturing network beyond Germany, including boosting production in China to as much as 700,000 vehicles.

Audi plans to build more cars outside its home country than domestically for the first time next year. The division is starting to use VW group plants in Russia, Stadler said today.

Audi accounted for 56 percent of Volkswagen’s first-quarter operating profit. The division has a target of dethroning Munich-based BMW as the world’s best-selling luxury-vehicle maker by the end of the decade. Audi sold 1.47 million cars and sport-utility vehicles in 2012, including 164,666 A3s.

VW’s other premium brands include sports-car manufacturer Porsche, British luxury-vehicle producer Bentley and the Lamborghini and Bugatti supercar nameplates. The company also owns the Seat and Skoda mass-market divisions.

Investment Budgets

Volkswagen outlined a 50.2 billion-euro group investment budget for its automotive business in November to finance new models, additional plants and research and development through 2015. Audi’s spending plans, announced in December, total 13 billion euros through 2016.

The MAN takeover bid is part of VW’s strategy to leapfrog Daimler AG and Volvo AB to become Europe’s largest truckmaker. Volkswagen is seeking more cooperation between its own commercial-vehicle operations, MAN and Swedish truck producer Scania AB, which VW also controls.

VW is offering 80.89 euros per MAN share in its bid. That compares with the truckmaker’s price today of about 84 euros a share. Investors who don’t accept the cash deal will receive an annual dividend of 3.07 euros a share.

JPMorgan Chase & Co. was the sole bookrunner of the convertible note sale, VW said yesterday. Orders for the sale were closed late yesterday because of strong demand, said a person familiar with the transaction who asked not to be identified because the matter was private.