What Volkswagen's Settlement With the Feds Will Mean for Investors

 Image source: Volkswagen.

Shares of Volkswagen (VWAGY -1.42%) rose sharply on Thursday on reports that the company is close to settling charges with the U.S. Environmental Protection Agency (EPA) and California state regulators. 

A $10.2 billion payment to settle EPA and California charges

Citing unnamed sources familiar with the negotiations between VW and regulators, Bloomberg, the Associated Press, and other news outlets reported that Volkswagen will agree to pay a total of about $10.2 billion to settle government and civil claims related to its diesel-emissions cheating scandal. 

The majority of that money will go to owners of the roughly 482,000 vehicles with 2.0-liter "TDI" diesel engines that were programmed to cheat on government emissions tests. According to the reports, owners will each receive payments of between $1,000 and $7,000 depending on their cars' age and other factors, with the average payment expected to be around $5,000. The cheating 2.0-liter engines were found in certain 2009 and newer Volkswagen and Audi models.

The settlement may also give owners the option to sell their cars back to Volkswagen or to terminate their leases early. 

VW will also agree to fund a grant program to offset the air pollution generated by those vehicles, the reports said. The fund will have an administrator appointed by the U.S. Department of Justice, Bloomberg reported, who will allocate funds to states. 

VW may also be required to pay some sort of fine to the EPA, to the California Air Resources Board (CARB), or both. 

The deal is expected to include penalties for violating the Clean Air Act and California air-quality laws, money to fund the vehicle buybacks, and payments to affected owners that will settle ongoing class-action claims. It's expected that the plan will be submitted to a federal judge for approval next Tuesday.

A surprise: VW might not have to fix all of the cars

Bloomberg reported that VW may not be able to repair all of the cars to the EPA's satisfaction. Earlier models were expected to require expensive, cumbersome modifications in order to bring them into full compliance with the Clean Air Act. If it can't feasibly repair some of the cars, the report said, VW may have to buy them back from consumers, make extra payments into the grant program, or both. 

What it means for investors and VW owners

VW's American depositary receipts were up about 5% as of noon on Thursday after the reports were published. While $10.2 billion is an enormous sum, I suspect that after several months of uncertainty, investors are simply glad to have a number (even a large one). 

That said, for VW, this won't be the end of the scandal. While the deal is expected to settle the charges filed by Federal and California regulators, as well as a series of class-action suits filed by owners of the affected cars, VW also faces charges filed by the Federal Trade Commission over its "clean diesel" advertising. It also, of course, faces civil and criminal proceedings in other jurisdictions around the world, including in its home country of Germany.

For U.S. owners of cars with the 2.0-liter engine, this deal should compensate them for lost resale value, with the option to simply sell their cars back to VW at a fair price and be done. That should be good news for them, assuming that the amounts paid under the settlement are fair. 

For investors considering taking a flyer on beaten-up VW shares, I'd still advise waiting until we see the final deal -- and until VW releases the results of the formal investigation into the scandal. While VW's future could be bright, there's still an awful lot of uncertainty here.