ANALYSIS-Porsche's VW options quandary: asset or liability?

* Put and call options package shrouded in uncertainty

* Analysts say sale of package to third party is one option

* Converting options could cost Porsche 6 billion euros

* Sale of VW stock to finance conversion may depress value

FRANKFURT, July 9 - The future of two of Germany's best-known auto groups hinges in large part on the value of a mystery package of Volkswagen (VW) options cornered by Porsche.

The financial instruments known as put and call options give debt-laden Porsche the right and potentially the obligation to buy as much as 20 percent stake of Volkswagen, likely influencing the course of attempts by Porsche to sell a stake to Qatar and merge with VW.

A Porsche spokesman declined to reveal details of its derivatives strategy, and little is known about the options -- such as the relative amount of puts and calls, the price at which they were bought, or the proportion that need to be converted into shares.

"Whether the VW derivatives are an asset or a liability is an unanswered question," said Sal. Oppenheim analyst Christian Breitsprecher. "Will Porsche earn money with this, or will it cost them?"

That question is key to what happens to the German sports car maker, whose 9 billion euros ($12.53 billion) in debt forced it to abandon efforts to build a VW stake of 75 percent.

Porsche chief executive Wendelin Wiedeking is seeking to bolster the auto maker's finances ahead of merger negotiations with VW to create an "integrated" company. The sports car maker is exploring new ways to pay down its debt after being turned down for a 1.75 billion euros loan by state bank KfW.

Porsche has said it is close to securing an investment from Qatar. Other ideas under consideration are a capital increase and the sale of the VW derivatives package, according to people familiar with Porsche's thinking, who added it may even combine some of these proposals.

CONVERSION TRAP

The derivatives secure Porsche access to an additional 20 percent stake in Volkswagen on top of the 51 percent it owns.

Analysts say it could cost the company 6 billion euros to convert the options into shares. If unable to finance the conversion of the derivatives, Porsche could even trigger a fall in VW's share price, devaluing the shares it owns.

"If Porsche has an obligation to buy more shares, without the funding to do so, then either Porsche defaults, and the banks will have to sell their VW position in the market, or Porsche will have to sell its existing VW stake to buy the 20 percent they are committed to," said Bernstein Research.

Whether the options book is a problem or opportunity for Porsche hinges mainly on the size and the strike prices of Porsche's put option on VW shares, said Sal. Oppenheim's Breitsprecher.

The puts could oblige Porsche to assume the losses if the VW share price falls below a certain level.

Because the VW stake was acquired in stages between 2005 and 2008, it is difficult for analysts to estimate what Porsche would have to pay to convert its derivatives into shares.

VW's share price jumped from around 36 euros in September 2005 to an all-time high of 1,005 euros a share on Oct. 28, 2008.

SALE TO A THIRD PARTY?

If Porsche's derivatives package is an asset, it could help strengthen Wiedeking's negotiating hand as he attempts to hash out a deal with VW.

UBS analysts said in a note this week that assuming Porsche agreed to an average exercise price of 100 euros for its options it would cost the company 6 billion euros on a pretax level to convert them into the 20 percent VW stake.

A third party would find it much cheaper to buy this package off Porsche than buying a 20 percent VW stake on the stock market, which would cost about 12.8 billion euros based on VW's current price of around 217 euros.

By selling the options package Porsche could raise 1.6 billion euros, assuming an average strike price of 90 euros and a fair value assumption of 120 euros per ordinary VW share, UniCredit said in a note.

Analysts said that if the entire package can be sold in one deal, Porsche's derivatives package could be a bargaining chip with which to pressure VW shareholder Lower Saxony and VW's management.

These are taking a close interest in where the stake ends up since anyone who has a 20 percent VW stake can block significant decisions at VW. Currently Lower Saxony, with a 20 percent stake in VW has a veto over any large decisions.