FRANKFURT - Volkswagen, Europe's largest carmaker, is considering a capital increase as one option among many to finance its takeover of debt-laden sports car maker Porsche, bankers familiar with the situation said.

Issuing any fresh voting shares is seen as a problem however, since it would dilute the 20 percent voting stake owned by the German state of Lower Saxony, wiping out its blocking minority.

VW ordinary shares were down 2.3 percent at 1441 GMT, while the German blue-chip DAX .GDAXI was down 0.22 percent. Separately, preferred shares in Porsche SE sank almost 12 percent as more reports emerged over that its finances had deteriorated further.

On Monday, the Financial Times reported that Volkswagen was considering raising up to 4 billion euros ($5.7 billion) ahead of a takeover of Porsche to protect its credit ratings, but did not provide further details.

Volkswagen is planning to buy Porsche's sports car business as fast as possible and, to finance this, they are thinking about strengthening their capital base, the FT quoted a person familiar with the situation as saying.

A spokesman for Volkswagen declined to comment.

At present, VW is authorised by shareholders to raise its capital by a maximum nominal value of 90 million euros until May 2011 through the issue of new ordinary shares, assuming management would gain the approval of its supervisory board.

This would allow for the issue of 35 million new ordinary shares, which would raise its capital base by nearly 12 percent.

Yet bankers involved in the deal cast doubt on a capital increase involving the sale of ordinary shares, since it would almost certainly meet with opposition from Lower Saxony, VW's second largest shareholder, which has two seats on the board.

Even when Volkswagen had to finance a costly restructuring programme at its ailing German operations that led to thousands of job cuts in 2006, it chose to raise 1.3 billion euros in fresh cash via the sale of its Europcar business that year rather than tap equity markets.

Another banker involved in the deal said the issue of a capital hike depends on whether VW would otherwise be prepared to temporarily let its rating slip to BBB+ from A-.

VW's management had sought, but did not receive, the necessary approval from shareholders in April for authorised capital worth a nominal value of up to 400 million euros by 2014.

If Volkswagen wanted to issue fresh non-voting shares, it would have to receive approval at a new shareholder meeting.

ORDINARIES

At present, VW can only raise its capital by a nominal value of 90 million euros until May 2011 through the issue of new ordinary shares, assuming management would gain the approval of its supervisory board.

This would allow for the issue of 35 million new ordinary shares, which would raise its capital base by nearly 12 percent.

Volkswagen said last week it plans a gradual takeover of Porsche, and Lower Saxony premier Christian Wulff said at the time that VW's supervisory board could approve a detailed plan on Aug. 13 with the aim of completing the deal in mid-2011.

Volkswagen's automotive operations had net cash of 10.7 billion euros at the end of March, so the group could afford to pay the reported sum of 8 billion for the Porsche acquisition.

VW had already said in early May that maintaining its existing credit ratings has top priority when considering any deal to create an integrated automotive group.

Germany's Der Spiegel reported recently that Porsche's debt totals around 14 billion euros. VW would need to pay Porsche roughly 7 billion for both the Porsche Holding auto dealership and a 49.9 percent stake in the Porsche AG sports car business, it said.

In order to bolster its negotiating position versus VW, Porsche said on Thursday it would seek at least 5 billion euros in fresh funds either through cash or a contribution in kind, or a mixture of both.
(Additional reporting by Philipp Halstrick, Edward Taylor and Marilyn Gerlach; Editing by Lincoln Feast)

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