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Will Volkswagen Have to Sell Audi?

The Volkswagen emissions scandal has begun to look like BP PLC’s (NYSE: BP) Deepwater Horizon catastrophe: Claim after claim. Government punishment after government punishment. A well leaking by the day with no way for management to stop it.

While it is much too early to determine what the emissions problems will cost VW, the number will move into the billions, and perhaps tens of billions of dollars. Like BP did, VW may need to sell assets. The most logical of these is luxury brand Audi.

VW has already set aside $7.3 billion to cover costs of the effects of recalls. However, these recalls may extend to other nations where governments have not begun testing. VW has 25% of the car market in the European Union and about 20% of the market in China. A recall in China, and the resulting financial effect, could swamp VW’s profits and erode its balance sheet rapidly. The $18 billion fine VW faces in the United States is unprecedented.

If VW’s balance sheet is shredded, it will need to sell assets. Among its largest ones are Porsche and Audi. The equity position Porsche has in VW makes a divesting of the brand unlikely. The Porsche and related Piech families hold just over 50% of VW’s stock. They might take Porsche independent again, but the conflicts of interest in the move based on VW’s deteriorating financing situation would make that nearly impossible.

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Audi Group is a large manufacturer on its own. Last year:

The Audi brand increased its total number of units delivered by 10.5 percent to 1,741,129 (1,575,480) vehicles in the 2014 fiscal year — a new all-time record for the Company. Hand in hand with the positive development in deliveries, revenue for the Audi Group increased to EUR 53,787 (49,880) million. Despite the cost-intensive input needed for new products and technologies, the expansion of our international production structures and the still-challenging environment in many markets, operating profit for the Audi Group of EUR 5.150 (5.030) million just exceeded the previous year’s level. The operating return on sales of 9.6 percent was at the upper end of the strategic target corridor of eight to ten percent.

While it is hard to estimate a market value for Audi, based on the market cap of similar sized Fiat Chrysler Automobiles N.V. (NYSE: FCAU), the number may be over $25 billion. VW might need every last euro of that.

Several of the world’s largest car companies could afford to buy Audi. Among the most logical is Honda Motor Co. Ltd. (NYSE: HMC), which has failed with its luxury unit Acura. Nissan has failed with its Infiniti luxury model as well. Audi would more than solve those problems — although there are some rumors that Audi may have emission problems of its own.

Will Volkswagen have to sell one of its largest assets? Based on the rapidly spreading emissions debacle, the answer is probably yes.

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By Douglas A. McIntyre