Richard Hilgert
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Morningstar | U.S. Securities and Exchange Commission Sues Volkswagen; EUR 230 FVE Unchanged

The U.S. Securities and Exchange Commission has filed a civil complaint against no-moat rated Volkswagen for securities fraud. The suit claims that the company issued $13 billion in securities in U.S. markets between April 2014 and May 2015 while company executives knew that numerous diesel vehicles had illegal cheat devices installed to evade emission standards. This, according to the SEC, fraudulently enabled the company to get more attractive pricing for the securities. According to Automotive News, Volkswagen stated that the law suit "is legally and factually flawed, and the company will contest it vigorously. The SEC has brought an unprecedented complaint over securities sold only to sophisticated investors who were not harmed and received all payments of interest and principal in full and on time."

We maintain our EUR 230 fair value estimate on the 4-star rated shares of Volkswagen following the announcement. Our only surprise is that the SEC had not filed the civil complaint sooner given that the diesel scandal broke more than three years ago. We have already included a EUR 20 billion reduction in our enterprise valuation for additional lawsuits such as the one filed by the SEC. Excluding the negative EUR 20 billion adjustment to Volkswagen's enterprise value, our fair value estimate would be EUR 274.

The reduction in our enterprise value also takes into consideration the uncertainty surrounding investigations into collusion among German automakers regarding diesel emission control equipment and EU consumer agencies seeking relief similar to remuneration received by U.S. consumers. In the U.S., consumers had the option to have Volkswagen buy back their vehicles or receive $5,100 cash plus free repair. European consumers were only offered free repair.

With regards to the collusion allegations, a fine of EUR 1.040 billion would result in a 1% variance in our EUR 230 fair value estimate. We estimate that if Volkswagen were fined a worst-case EUR 23.5 billion (our estimate based on European Union antitrust law), our fair value estimate would drop to EUR 178 from EUR 230. Under current trading conditions, Volkswagen stock’s 4-star rating would remain intact and the shares would be trading at a 19% discount to a EUR 178 fair value. We also note that the worst-case antitrust outcome scenario did not include any of the EU’s potential “mitigating, leniency, or settlement” factors in calculating the fine.
Volkswagen AG


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Richard Hilgert

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