Volvo falls 5% after it sets out to dilute stake in electric vehicle maker Polestar

Shares of Volvo Cars dipped on Friday, after the company said it would dilute its stake in electric vehicle maker Polestar by distributing 62.7% of its holdings to its shareholders.

The move would "enable Volvo Cars to concentrate its resources on the next phase of its transformation," the company said in a statement on Friday.

The company's stock traded over 5% lower at around 10:00 a.m. London time, paring some of its earlier losses.

If approved during the company's annual general meeting of March 2024, Volvo would retain around 18% of Polestar's shares.

"As we have significant operational collaborations with Polestar and a financial relationship, it is logical for us to retain influence through a smaller 18.0 percent stake in Polestar," said Jim Rowan, president and CEO of Volvo Cars.

The announcement comes after the company said earlier this month that it would stop funding ailing brand Polestar and is considering adjusting its holdings in the electrical vehicle maker. Rowan at the time said that the changes were part of a "natural evolution" in the relationship between the automakers.

Polestar was once touted as an up-and-coming electric vehicle company, but has since struggled to find success. Earlier this year, the company said it was planning to cut around 15% of its workforce, as it faced "challenging market conditions."

Polestar in January said it had missed its delivery target for 2023, citing low levels of demand, persistent inflation and a price-war stoked by rival electrical vehicle maker Tesla as key factors. The company's challenges have raised questions around its ties to Volvo among analysts.

Volvo Cars on Friday said its majority shareholder, Chinese automotive company Geely Holding, "would continue to provide operational and financial support to Polestar."

Volvo Cars did not immediately respond to a CNBC request for comment.