New Delhi/Mumbai: Setting the stage for yet another mega deal from the Tata group, Ford Motor Co. finally confirmed it is now in “substantive discussions’’ with Tata Motors Ltd “with a view to securing an agreement” to sell Jaguar and Land Rover.
While it didn’t discuss the potential price that Tata Motors has offered to outbid two other groups and become the preferred buyer, Ford said “there is still a considerable amount of work to do”.
“We are pleased by the progress in the discussions to date and very positive about the prospects of this business going forward,” said a Tata Motors spokesperson, who offered no other details.
Some analysts have put the potential sale price at around $2 billion (Rs7,900 crore), but it is yet unclear what it took for Tata Motors to outbid Indian rival Mahindra and Mahindra Ltd, which is India’s top utility vehicle maker, and private equity player One Equity Llc. M&M declined to comment.
News of the Tata-Ford talks comes less than a year after the Tata group kicked off 2007 by winning a fierce bidding war and paying $12 billion to win steel maker Corus Group Plc. That move was hailed as a major coming out party for Indian mergers and acquisitions deals, much like the Jaguar and Land Rover news is likely to be regarded as the continuing of that trend, this time with iconic brands.
Indeed, if the deal is consummated, Tata Motors’ global footprint will dramatically rise. Jaguar has 871 dealers in 64 markets while Land Rover has 1,376 dealers in 138 markets. In comparison, Tata has around 500 outlets in 11 markets, including India.
But unlike Corus, which the Tata group bought at a time when global commodity prices, including that of steel, are on an upswing, Land Rover has only recently broken even while Jaguar, despite its marquee status in the world of expensive cars, remains unprofitable for Ford, which needs the money to focus on improving its US brands.
Some industry observers say Tata Motors will have its hands full if the deal goes through because even Ford has had a hard time making money from the brands even when the US-based auto giant’s strategy, at least when it acquired the two brands, was not dissimilar to Tata’s: step out of its large home market and become a player elsewhere, in Ford’s case, in the premium European car market.
Ford bought Jaguar in 1989 for $2.5 billion and Land Rover in 2000 for $2.73 billion. While Land Rover returned to profitability in the second quarter of 2007, Jaguar has been making losses for the past five years and Ford assumed an impairment of $1.6 billion in 2005 and $1.3 billion in 2004 for these two companies, according to its annual report.
At the heart of the problem has been Ford’s inability to bring new Jaguar products quickly to the market, and especially those powered by diesel engines, an area which is dominated by rivals Daimler AG’s Mercedes-Benz cars and BMW AG.
“The products were too old and they waited too long for new models and diesel engines,” said Roger Maddison, national officer (auto), who represents Unite, a UK-based trade union, which is involved in the negotiations. “We wonder why they (Ford) want to sell right now when Jaguar is turning the corner.”
Ford has so far invested $10 billion in Jaguar, which recently unveiled the XF model at the last Frankfurt Motor Show that is slated to hit the roads this year. Land Rover, too, will be unveiling its new LRX Concept at the North American International Auto Show this month. Both the XF and LRX have received rave reviews from automotive writers.
“We have always been very clear that Jaguar faces a very challenging business environment and that it would not be a quick fix,” said Ford’s UK spokesman John Gardiner. “Jaguar...has the right products in its pipeline.”
Despite the Ford investments so far, Tata Motors might also have to pump in more money as the European Union gets ever more stricter about controlling pollution, especially from cars made and driven in Europe.
More than 50% of Land Rover and Jaguar sales are in Europe. Neither brand is sold directly in India. The British Midlands-based operations, which produced 268,593 vehicles in 2006, have at least 15,000 employees in five locations, according to various reports.
Tata’s operations in India look lean in comparison. At its Pune factory alone, Tata Motors’ 1,700 or so workers produce about 225,000 cars a year.
Once the deal closes, in addition to two famous brands, Tata’s could also end up with three factories in the UK that can make more than 250,000 vehicles a year.
Meanwhile, it is likely to be a hectic week for Tata Motors chairman Ratan Tata, who is set to unveil an inexpensive car, which at Rs1 lakh will be India’s cheapest model. Tata will unveil the car on 10 January at India’s auto exposition in New Delhi.
By now, Tata is also a veteran of facing down sceptics of the company’s buyout spree, which has been on for some years now. Tata Tea Ltd bought the loss-making UK-based Tetley Tea, which was several times its size and made Tata Tea the world’s No. 2 branded tea maker. Overall, the Tata group has spent around $15.5 billion in acquiring foreign companies, and supporters, especially investors, don’t seem to fret about merger integration issues or the financial impact of such big bites.
Shares of Tata Motors, which ended at Rs794.25 on the Bombay Stock Exchange on Thursday, have risen 20.8% since Tata confirmed his intent to bid for Jaguar and Land Rover on 24 August.
If Tata Motors closes out the Land Rover and Jaguar deal, it will be a remarkable turnaround for the company, whose early attempts at making cars, in the form of the Tata Indica, met with a lot of quality derision even though tens of thousands of the cars have ended up in rental car fleets.
Indeed, the cheapest Land Rover sells for the equivalent of about Rs15.5 lakh in the UK, where it’s made.
The most expensive car that Tata’s make costs Rs11.64 lakh in India, though the bulk of its cars are significantly cheaper. To be sure, India, one of the fastest growing new car markets, is still a nascent segment for expensive models.
The Indian market for premium vehicles—the cheapest of which, such as the Accord by Honda Siel Cars India Ltd, costs about Rs15.5 lakh—is currently limited to around 15,000 cars a year, say analysts. Many rich Indians do own and drive expensive, high-end foreign cars, such as BMW, Mercedes-Benz, Audi, Lexus, but the numbers are in hundreds.
Tata Motors has underperformed in independent quality rankings, such as those by market research firm JD Power and Associates, in India. That’s primarily because, in India, JD Power only assigns rankings to the top three models in a category and Tata’s cars often don’t feature in that shortlist.
Jaguar, on the other hand, was ranked six, while Land Rover came in last among 35 brands in a worldwide initial quality study conducted by the same firm last year.
“In the auto industry, these opportunities (to acquire brands) don’t arise frequently,” said Ashvin Chotai, an independent auto industry consultant and formerly director of Asian automotive research at consultancy firm Global Insight Inc., speaking prior to Ford’s confirmation of the talks. “It’ll likely cost them a lot of time and money to develop (such brands) in-house and these acquisitions give them a jump-start,” he added.