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THE WALL STREET JOURNAL

Porsche, Volkswagen Agree To Framework Of Merger Deal -- Sources

By DANA CIMILLUCA

Of THE WALL STREET JOURNAL

Porsche Automobil Holding SE and Volkswagen AG will take another step toward uniting Thursday, when they are expected to announce the framework of a deal that would raise much- needed cash for Porsche and ultimately fold it into VW, people familiar with the matter said.

The supervisory boards of the German automakers are expected to vote Thursday morning on a so-called memorandum of understanding, which would be a precursor to a more detailed and firm merger agreement, one of the people said.

As part of the deal, a state-backed Qatari investment fund is expected to lend Porsche's holding company EUR250 million ($355 million), less than it earlier planned, one person said. Qatar may also take a larger-than-expected 10% stake in Porsche's holding company, which currently has a market value of EUR7.7 million, this person said.

Porsche was forced into VW's arms when a bold attempt to buy its much larger rival backfired. Porsche had bought a roughly 50% stake in VW, Europe's largest automaker, and secured options on another 20%. But the roughly EUR10 billion in debt it accumulated in the process ultimately proved too much to bear. Amid slumping auto demand, Porsche is now scrambling to raise funds to pay off the debt, which will ultimately cost the storied automaker its independence.

As part of the complicated deal, which would ultimately merge both the Porsche holding company and its auto unit into VW, both Porsche and VW plan to raise fresh capital. It is unclear how big the capital increases will be, but late last month, Porsche said it would sell new shares worth at least EUR5 billion.

To maintain their stake in the luxury automaker, the Porsche and Piech families plan to sell an auto distribution business based in Austria to Volkswagen for more than EUR3 billion, one of the people said. As expected, Qatar is also expected to buy a 17% stake in VW through the options Porsche accumulated, which are valued at as much as EUR5 billion.

The terms could still change and there's no guarantee the boards will approve the deal, which at any rate would still be subject to further negotiation.

Spokespeople for Porsche, Volkswagen and Qatar couldn't be reached for comment late Wednesday.