Tata Motors will buy luxury brands Jaguar and Land Rover from Ford Motor for $2.3 bn in cash. The purchase price is less than half of what Ford had paid for the two brands as demand for luxury vehicles has dropped the world over. The acquisition is the largest ever by an Indian company in the automobile space.
Ford will pay about $600 mn to the Jaguar Land Rover pension funds, the two companies said in a joint statement today. Ford had bought Jaguar in 1989 for $2.5 bn while Land Rover was bought from BMW for $2.5 bn in 2000.
The transfer of ownership to Tata Motors is expected to close by the end of the next quarter, subject to regulatory approvals. “We have enormous respect for the two brands and will endeavour to preserve and build on their heritage and competitiveness, keeping their identities intact,” Tata Motors Chairman Ratan Tata said.
Alongwith the two brands the deal will involve acquisition of plants and Intellectual Property Rights (IPR) held by the two brands.
Tata Motors did not mention the mode of financing the deal, but sources familiar with the developments said it would be done mainly through bridge financing from a clutch of banks, including JP Morgan, Citigroup and State Bank of India (SBI). The company is raising Rs 4,000 crore through issue of securities in the foreign and domestic market in one or more tranches.
Analysts said the company has a robust balance sheet with strong cash flow and EBITDA. “The Tatas have made sure that the deal will not over-leverage their balance sheet,” said a source who tracked the deal.
Others are not so convinced. Analysts have expressed concerns about how the global, marquee brands would fit into Tata Motor’s stable of trucks, buses and passenger cars, including the Nano, the world's cheapest car which it plans to begin selling later this year.
The Tatas will also have to resuscitate demand after Jaguar sales in the US and Europe dropped 33% so far this year. Ford doesn't disclose financial figures for Jaguar and Land Rover, whose biggest markets are the UK and the US. Jaguar is unprofitable, and Ford lost $2.7 bn in 2007 and $12.6 bn in 2006.
As part of the transaction, Ford will continue to supply Jaguar and Land Rover for differing periods with powertrains, stampings and other vehicle components, in addition to a variety of technologies, such as environmental and platform technologies. Ford has also assured Tata Motors of providing provide engineering support, including research and development, plus information technology, accounting and other services.
In addition, Ford Motor Credit Company will provide financing for dealers and customers of both the brands during the transitional period, which can vary by market, of up to 12 months. Also, both the parties do not anticipate any significant changes to the terms of employment. Together both the companies employ 16,000 personnel.
Alan Mulally, president and CEO of the Ford Motor Company, said, “Jaguar and Land Rover are terrific brands. We are confident that they will continue to thrive under Tata's stewardship”
The deal has taken almost nine months to fructify as both the companies were engaged in advanced talks pertaining to engines and parts supply from Ford, pension liability of Unite workers, and retrenchment, among other issues. Ford supplies about 90 per cent of components to Jaguar and Land Rover.
Ford had invited Tata Motors to get into a more detailed discussion in January after the Indian giant was declared as the preferred bidder among other parties, including the alliance of Mahindra & Mahindra and Apollo Management and One Equity Partners, which was headed by Jacques Nasser-former CEO of Ford.
The Tata Motor stock had nosedived 4.24 per cent during the day to reach the days' low of Rs 651.10 but recovered gradually to end at Rs 679.40 — still a dip of 0.08 per cent on the Bombay Stock Exchange (BSE).
JP Morgan and Citigroup had advised Tata Motors on the deal.
What will Tata get?
Not only will Tata's product portfolio span from a price point of $2,500 to $170,000, its distribution network will grow more than four times to 2,700 outlets in 138 countries. Its global footprint will also increase with the acquisition. The Tatas will be able to market its own product abroad with an in-place and well established dealer outlets.
This apart, the deal will open the doors to vast technological advancements that both the brands have achieved over the years thanks to grand funding by Ford. Almost a billion dollars is invested every year as R&D for both the brands. Tata Motors will eventually be able to trim down the costs with the help of sisters companies like Tata Consultancy Services, Tata Technologies and Tata AutoComp.
The technology sourced from Land Rover will also be used for Tata's range of utility vehicles.
“Jaguars and Land Rovers share many components, from the engines down. Keeping them together makes sense from both an engineering and business point of view. Whilst Aston Martin was a relatively small, self-contained unit, Jaguar and Land Rover are even more closely integrated into the Ford machine. Dis-entangling them would be difficult, if not futile”, said an analyst.
Ford does not share details of individual brands but sales from the Land Rover brand is believed to have pushed the group's revenue substantially as it rose by 18 per cent for the company even as Jaguar posted a drop of 19 per cent in 2007. Land Rover's annual sales crossed 200,000 units for the first time ever as markets like Russia, Spain, China and France recorded best sales.
Source: Business Standard