Tata Motors Ltd’s pursuit of Ford Motor Co.’s Jaguar and Land Rover luxury units spurred A.S. Thiyaga Rajan to sell 99% of his shares in India’s biggest truckmaker. He isn’t alone in dumping the stock.
The Mumbai-based company is down 11% since 3 January, when it was named Ford’s preferred bidder. Holders such as Alliance Bernstein Japan Ltd and Waddell and Reed Financial Inc. sold their stakes after the overture for UK-based Jaguar and Land Rover was reported in July.
Investors are complaining that Tata Motors may not be able to spend enough in India, the second fastest growing major auto market behind China. The company should focus on the $2,500 (Rs100,000) Nano microcar, not $100,000 Jaguars, said Rajan, who manages $250 million at Singapore-based Aquarius Investment Advisors Pte.
“Integrating the acquisition isn’t going to be easy at all,” Rajan said. “I can’t see an iota of fit in this deal.” He wouldn’t disclose the size of his stake in Tata Motors, which he began accumulating five years ago.
Buying Land Rover and Jaguar may cost Tata Motors $1.7 billion, or four times 2007 earnings, and cut fiscal 2009 per-share profit by 42%, Merrill Lynch & Co. Inc. analyst S. Arun says. Morgan Stanley’s Balaji Jayaraman recommends selling the stock and says it may fall 11% in 12 months.
Tata Motors and Ford, the world’s third largest automaker, are in final talks on a deal to give the Indian company access to advanced engines and powertrains and control of two of the world’s best-known luxury brands after only 10 years of making cars.
“We are very satisfied with the progress of the discussions,” Tata Motors spokesperson Debasis Ray said, declining further comment.
While 18 analysts including Arun in a Bloomberg survey call Tata Motors a buy, the shares fell 18% in the 12 months ended on Wednesday, while India’s Sensex index rose 45%. Three analysts say to hold and two recommend selling.
The company “will face considerable execution and integration challenges” with Jaguar and Land Rover, said vice-president Elizabeth Allen of Moody’s Investors Service, which said on 4 January it may lower Tata Motors’ Ba1 debt rating. Standard & Poor’s also cited the deal in saying it may cut Tata from BB+.
Credit default swaps on Tata debt have almost doubled to a record since 3 January, according to CMA DataVision in New York. The contracts are used to protect bondholders against default. A rise in price reflects a drop in perceptions of credit quality.
Besides, AllianceBernstein LP and Waddell & Reed Inc., other large sellers include BlackRock Inc. investment managers, which got rid of more than 1 million shares, or 87% of its stake, according to a 10 December filing.
“If the acquisition doesn’t fit well with Tata Motors, the cost of shutting it down would be close to $5 billion,” said Gulbir Madan, who manages about $400 million in Indian equities including Tata Motors shares at Neptune Capital Management Llc. in New York.
Ratan Tata, 70, chairman of parent Tata group, rejects suggestions Tata Motors is overreaching by adding luxury brands to pair with Nano—the world’s cheapest car. “We’re not trying to be a global player,” he said in New Delhi on 10 January after unveiling the Nano, which will be built in a new plant costing $249 million. “We will grow internationally in select markets.”
Tata Motors, which controls more than half of India’s truck market and about 17% of passenger car sales, has leaped ahead before by acquiring other companies.
Buying South Korea’s Daewoo Commercial Vehicle Co. Ltd in 2003 enabled the company to produce trucks with as much as 400 horsepower — more than twice what it had been building, and enter the very-heavy truck segment.
“On their own, Tata would have taken years to get this technology,” said analyst Amit Kasat of Motilal Oswal Securities Ltd in Mumbai, who rates the shares as a “buy.”
Still, success with Jaguar and Land Rover would buck recent history in industry buyouts.
Germany’s DaimlerChrysler AG lost $12.6 billion in market value during its nine-year ownership of Chrysler Llc. before selling 80.1% of the US automaker to Cerberus Capital Management LP last year.
Ford has tried for 21 years to boost earnings, but Jaguar was never consistently profitable following the 1989 buy. Ford bought Land Rover in 2000.
Tata Motors’s interest in the U.K. units “seems odd, given their historic focus on mass cars for the cost-conscious,” said Devan Kaloo, who helps manage $9 billion for Aberdeen Asset Management Ltd in London.
The Ford deal “potentially will be value destructive,” said Kaloo, who doesn’t own the stock.
Investors shouldn’t be distracted by enthusiasm in India for a domestic takeover of two UK brands whose roots date to the days of British colonial rule, Rajan said.
“Patriotic ebullience doesn’t rub off on the shares,” he said.
Pooja Thakur in Mumbai and Subramaniam Sharma in New Delhi contributed to this story.