Volkswagen (VWAPY) – Premium Mean Reversion – 18% Upside

Current Premium: 23%

Average Premium: 5%

Upside: 18%

Expiration Date: TBD

This idea was shared by DiSam.

 

This is not a new idea, however, I believe, it fits nicely among currently actionable special situations.

Volkswagen is one of the largest automobile manufacturers and a stock that doesn't need much introduction. The company has two share classes - 295m ordinary shares (US ADR ticker - VWAGY) and 206m preferred (ADR ticker - VWAPY). The shares are almost identical from the economic value perspective, only that ordinary shares have voting rights, while preferred shares have €0.06/share higher dividends. However, it's important to note that voting rights of the ordinary shares are basically useless as over 90% of ordinary shares (and voting power) is controlled by 3 major shareholders:

  • Porsche - 53.3%;
  • State of Lower Saxony - 20%;
  • Qatar Holding - 17%.

On top of that, ordinary shares have a very limited float, whereas preferred shares offer slightly higher dividends and are included in a wider specter of various indexes:

In the rational world, I'd say that preferred shares should be trading above the ordinary shares, or at least be equally valued. This used to be the case till the short spike during COVID outbreak (prefs sold-off more than the ordinaries). Last month the premium spiked up again, this time to 49%.

The premium has narrowed down to 23% since then, however, is still significantly above the historical levels. This offers an opportunity to play on the premium mean reversion. There's plenty of VWAGY shares to borrow on IB - 400k shares at a 2% annual fee.

Worth noting that a similar German case has already been published on SSI (BMW.DE), which didn't quite work out - BMW.DE  ordinary shares continue to trade at a large premium to the preferreds. However, this time, we at least clearly know the reason behind such widening of the VWAGY premium - Volkswagen's Battery Day announcements and plans to conquer the EV market subsequent to which uninformed EV investors rushed to buy Volkswagen (a bit more details below). Most of these investors were likely uninformed about the cheaper preferred shares - even several media articles appeared suggesting "Don't buy the wrong Volkswagen".

There is no clear catalysts for the premium mean reversion, however, I believe that with time the spread is likely to narrow down back to its historical levels of 5%-10%.

Two more points:

  • Current events happened in light of the Porsche spin-off rumors, which might also have an effect on the gap of these securities. Although, it's worth mentioning that when the rumors came out (Feb'21), it made no effect on the spread between the two shares.
  • Part of the reason why such elevated premium still exists and was not arbitraged right away despite seemingly plentiful borrow and liquidity is the reluctance to get involved in shorting Volkswagen's ordinary shares after the infamous short squeeze in 2008. Although VWAGY float is still very small (less than 10%) and there is some risk of getting burned on the short side, the current situation is completely different from 2008 and the chance of another squeeze seems limited.

 

Background information

The spikes in Volkswagen share prices (and also the widening of the spread between two share classes) happened after the Volkswagen's "Power Day" announcement on the 9th of March (the spread increased from 13% to 22% on the 10th of March), the Power Day itself (15th of March), and Q4'20 earnings release (16th of March). During that week, Volkswagen basically announced its plan to beat Tesla and become the world's largest EV manufacturer by 2025, which sparked a lot of hype and uninformed investors rushed to buy Volkswagen's stock most likely without much consideration to cheaper alternatives (i.e. the preferred shares).

 

2 COMMENTS

  1. Ilja

    VWAGY premium over VWAPY has widened again to 32%, mainly due to increase in the price of ordinary shares (VWAGY).

    1. snowball

      BWM (ordinary) premium over BMW3 (preferred) has narrowed to 17%, returning to its pre-2019 historical norm.

      Do you think the future “norm” for VOW premium should be similar to BMW (i.e. mid-teens) or its own historical range ( i.e., parity)?

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