The India media has been awash over this last week with dramatic reports that the country's biggest carmaker Tata Motors could be about to jump into the bidding for Ford's up-for-sale Jaguar and Land Rover units, with its audacious attempt to break into the luxury/prestige sector possibly set to come in conjunction with its joint venture partner, Fiat. This report by Nandini Sen Gupta and Lijee Philip is courtesy of the The Economic Times:

From people’s car to the queen’s car, Tatas want to build them all. After raising a storm in the auto world with their Rs 1-lakh car plan, the Tatas now seem to be eyeing a foray into the world of luxury sedans through iconic British brands Land Rover and Jaguar, which holds Royal warrants from Queen Elizabeth II and Prince Charles.

Tata Motors, India’s biggest automobile company, and tractor and utility vehicle major Mahindra & Mahindra are understood to be exploring the possibility of bidding for Jaguar and Land Rover, owned by the Ford Motor Company. The deal size is being estimated at about $1.5 billion (£735 million) for the two-storied brands that epitomise the British automobile industry. Industry analysts said that the Tatas may finance the bid in conjunction with Fiat, which has the Ferrari and Alfa Romeo brands in its portfolio. The two automobile majors recently entered into an alliance to jointly market and manufacture Fiat models in India. When contacted, a Tata Motors spokesperson said, “We have absolutely no comments to make on mergers and acquisitions.” Mahindra & Mahindra vice-chairman Anand Mahindra too refused to comment.

According to sources in the auto industry, the bids are due soon and both Indian players see considerable value in these cult luxe marques. However no final decision has been made by either player. Sources also say that Tata Motors may also be looking to team up with private equity players for the deal, apart from the possibility of bidding with Fiat. Indeed the Tata-Fiat combine could even team up with a private equity player, though there is no confirmation of this. As for M&M, its real interest is in Land Rover, say analysts, but since the two brands are being offered as a package deal, it is looking at a combined bid. Although there is no confirmation on the size of the deal, international media is pegging it at around $1.5 billion, significantly more than the $848 million that the Dearborn (Michigan)-based Ford got for its other British bespoke brand Aston Martin this March.

Sources say both Tatas and Mahindras have signed confidentiality agreements and are currently “evaluating” the possibility of making a bid. Ford has reportedly asked Goldman Sachs, Morgan Stanley and HSBC to advise on the sale. Tata Motors is understood to have instructed merchant bankers to evaluate the merits of a joint offer for Jaguar and Land Rover, which have been earmarked for disposal by the struggling US auto giant.

Some people close to the situation said Tata Motors’ evaluation of a bid was at an ‘exploratory’ stage and may not lead to a formal bid. Ford bought Jaguar in 1989 and Land Rover in 2000. If the two companies are now valued at around $1.5 billion, it would be a lot less than the £1.6 billion (or around $2.5 billion) that Ford paid for the Midlands-based Jaguar. In the past 18 years, Jaguar has totted up trading losses worth around £1.6 billion. As for Land Rover, Ford bought it from BMW for even more -around $2.7 billion. So Ford paid a cumulative total of more than $5 billion for the two brands.
 

Rumours that the two would be clubbed together in a bid to make the former more attractive have been doing the rounds since last August. Reason: Jaguar has not flourished under Ford while Land Rover has had strong sales and is making money. Jaguar has about 10,000 employees in Coventry, Birmingham and Liverpool, while Land Rover employs 9,000 in the West Midlands and Warwickshire. According to industry sources, private equity firms Apollo Management, Cerberus Capital Management, Blackstone Group and Alchemy Partners have reportedly been interested in the Jaguar-Land Rover deal. Ford had earlier reportedly sounded out Fiat, Renault, Hyundai and a Russian company for a combo Jaguar-Land Rover deal but with no success. Ford, which bled losses worth $12.6 billion last year, has been selling off its Premier Automotive Group brands and Volvo Cars, the last of the lot, is also reportedly on the block.

Analysts indicate that Tata Motors can comfortably finance the acquisition of Jaguar and Land Rover. The Indian automaker is sitting on a cash pile of over Rs 6,000 crore and generated free cash of over Rs 1,000 crore during FY07. It can easily use these reserves to raise more funds without endangering its finances. At the end of last financial year, Tata Motors’ debt-to-equity ratio was a low 0.56, giving it ample head room to raise more funds.

But why should a company spend $1.5 billion in acquiring Jaguar and Land Rover, when it has its own large capex plans, some analysts are asking. Over the next 3-4 years, Tata Motors plans to invest Rs 12,000 crore in setting up new units for a small car, trucks and SUVs and also to expand the capacity of its existing units. In FY07, for instance, the company invested close to Rs 2,500 crore in plant & machinery, more than double of the previous year. Besides, it’s also pumping money into developing new platform as part of its plans to replace its entire existing product lines with new generation products. One person familiar with the situation said that Tata Sons has been on an acquisition mode for all its businesses, which range from retail and chemicals to IT outsourcing and tea. “Ever since the Daewoo deal, many companies have been approaching us. Besides these are non-binding bids and we can walk out of it at any time.”

Besides Tata, other car makers may still be interested in bidding, while a formal auction would also be likely to attract private equity firms, sources said. Cerberus, the US buyout firm, acquired Chrysler this year for just under $7.5 billion. Industry watchers indicate that if the proposed acquisition goes through, then it’s going to be a challenge for Tata Motors. These marquee brands have very high production costs and require phenomenally high engineering and research capabilities as they compete with likes of BMW and Audi. The Tatas do not possess such capabilities. “Taking over the brand is easy, bringing down production costs and turning around the company successfully, will be the challenge,” analysts said. It’s a test that Ford failed.

Report courtesy of The Economic Times