Tata Motors Ltd, India’s largest vehicle maker by revenue, agreed to buy the Jaguar and Land Rover (JLR for short) brands from Ford Motor Co. for $2.3 billion (Rs9,223 crore) in cash, landing its first luxury marques in the middle of an economic slowdown in key markets, including the US and the UK.
The buyout, which will be completed in a quarter after it is cleared by regulators, is priced slightly higher than the $2 billion estimated by analysts, but it’s less than half the $5.23 billion that Ford spent on buying these brands.
The deal is the second most expensive acquisition made by a company in the Tata group, which has interests in businesses from tea to trucks. A little over a year ago, Tata Steel acquired Corus Plc. for $12 billion in a deal that was considered audacious by some because Tata Steel was a much smaller company.
The JLR deal is also the latest in a growing list of acquisitions made by the group as it strives to become a global conglomerate, an articulated objective of its head Ratan Tata.
Tata Motors said it will fund the purchase with a bridge loan arranged by banks and look to repay these loans by selling off some of its units and by raising debt. It declined to say which units it would put on the block or how much the current loans had cost in a market where credit is becoming expensive and hard to come by as lenders exercise more caution in the wake of the credit crisis in the US that has since spread to most other markets.
Apart from the money paid by Tata, Ford will contribute some $600 million to plug pension fund gaps, or a shortfall in money set aside for employee pensions when they retire. Tata says it will keep all the 16,000 jobs at the two UK firms that have sales of $14 billion.
Tata Motors shares closed flat at Rs679.40, as the broader benchmark Sensex closed 130 points lower. Meanwhile, US markets were sliding Wednesday evening on news that US durable goods orders have dipped, signalling a recession at hand.
While Tata has always maintained that its purchases are part of a long-term strategy, the deal comes at a time when everyone is betting on at least 18 months of a global slowdown.
“It doesn’t make much sense to me to purchase a luxury brand auto company at a time when the credit crunch and deleveraging suggest that discretionary consumer spending will be under pressure—not just for a few months but perhaps for a year or two,” said George Magnus, senior economist at UBS in London, just before the announcement. “But companies have different time perspectives from investors and it’s quite possible that timing is only one issue for Tata in an array of strategic decisions.”
The global credit crisis has already caused thousands of job cuts on Wall Street and is forcing people to be more thrifty; it triggered a 10% drop in US auto sales last month. Sharper declines are expected and the fall in US sales led Ratan Tata, chairman of Tata Motors, to comment on the sidelines of the Geneva Motor Show earlier this month that he “almost couldn’t drink (his) coffee” the morning the news broke.
Jaguar’s 871 dealers in 64 markets and Land Rover’s 1,376 dealers in 138 markets may be caught in that slowdown. The US is the world’s largest market for automobiles and that, combined with record oil prices, could mean that a global slowdown in auto sales may be inevitable.
Tata has around 500 dealers in 11 markets, including India, where sales are already hurting although they are still far healthier than those in more mature markets.
Tata Motors, which is making the world’s cheapest car, the Tata Nano, has become India’s largest auto maker by selling low-cost cars and trucks. The company has no experience in managing luxury brands, and its costliest passenger vehicle, the Safari Dicor, is about Rs1 lakh cheaper than the least expensive Land Rover.
The Indian market for premium vehicles is rising but is still small. The cheapest luxury cars available here, such as Honda Siel Cars India Ltd’s Accord, cost around Rs15.5 lakh. Analysts say some 5,000 luxury cars are sold in India every year.
Some Indians do own and drive expensive, high-end foreign brands, such as BMW, Mercedes-Benz, Audi and Lexus, but their numbers are still in the thousands, a fraction of the 1.4 million cars sold each year in the country’s exploding automobile market.
Moreover, sales of luxury goods, such as Cartier watches, are seeing a slowdown with global financial markets in turmoil due to the subprime crisis. Economists are forecasting slower growth in Europe, which accounts for more than half the sales of both Land Rover sports utility vehicles and Jaguar cars.
Moreover, the profitability, or lack of, of the two brands and commitments made to British labour unions in a slowing economy could compound problems for Tata Motors, say analysts.
While Ford and Tata maintain that together Land Rover and Jaguar are “profitable”, Ford admits that Jaguar has been making losses for “quite a long time and is significantly improving with the launch of new products.” While Jaguar posted a 19% drop in unit sales in 2007, Land Rover sales rose 18%.
“Manufacturing is going into recession,” said George Buckley, chief economist at Deutsche Bank in London, who spoke to Mint before the deal was announced. Manufacturers will cut back on jobs depending on “how long they think it will last. It’s not expensive to rehire employees,” he added.
Ford has agreed to use its finance arm to help its dealers and Tata sell cars for another 12 months and it will also supply engines, transfer some intellectual property and provide engineering support.
Despite Ford’s investments in the two marques so far, Tata Motors might also have to pump in more money to develop new and improved products as the EU gets ever more stricter about controlling pollution, especially from cars made and driven in Europe.
“We believe that the system (of carbon-dioxide emissions) will run on a fleet average emission principle,” said Andrew Wright, senior analyst at consultancy firm CSM Worldwide. “Under new ownership Jaguar/Land Rover will no longer be classified under Ford of Europe. Since sales of more fuel-efficient Tata vehicles in the region are currently very low, this means that Jaguars and Land Rovers…are likely to show a greatly increased fleet emissions figure post-Ford with no smaller cars to bring the average down. (These) sound warning bells for” Jaguar and Land Rover, and, by extension, Tata Motors.
Still, the Tata group, which has always held it’s a long-term player, has had a successful history of turning around brands and companies it acquired overseas and proving detractors wrong. In the most recent of these instances Tata Motors launched a $2,500 car, which many rivals had dismissed as impossible to make. In January, after nearly four years of development, the company unveiled the Tata Nano which is ahead of India’s current safety and emission requirements and has aroused such interest that the website on the car has had more than 15 million hits.
In 2000, the Tata group bought the UK-based Tetley; over the last few years it has bought several overseas assets ranging from steel makers to a Korean truck maker.
JP Morgan and Citibank advised Tata on the Jaguar Land Rover deal.
Ammar Master contributed to this story.