The Hindu Business Line : Deal to provide access to Western markets

The acquisition of the Jaguar and Land Rover (JLR) businesses by Tata Motors in an all-cash deal from Ford for approximately Rs 9,200 crore, (about a fourth of estimated sales of JLR in 2007) cannot be considered expensive.

Land Rover (acquired by Ford for $2.7 billion in 2000) has seen a significant step-up in its sales in the last two years, thanks to the success of its new models. But, Jaguar (acquired by Ford in 1989 for $2.5 billion) continues to languish. Given these losses suffered by Jaguar and the additional investments that Tata Motors might have to make towards working capital and R&D over the next few years, the deal may absorb considerable resources. The key here is the ability of Tata Motors to implement cost savings at JLR. What will help assess the long-term impact of the acquisition on the profitability of Tata Motors is how much of the marquee brands’ component sourcing can actually be done from India, though according to the deal, Ford will continue to supply powertrain, stamping and other components.

Though the Tatas may help bring about operational improvements, the new emission norms, likely to be implemented in the EU from 2012, will be challenging to the company as they might have to invest further resources in making these brands compliant to the new regulations.

On the face of it, JLR may not appear to be a good fit in the Indian market, being in the higher end of the price segment, a nascent market in India. Having said that, Tata Motors is probably looking to other benefits from the deal. For one, this deal will raise the visibility of the company and make penetration into key Western markets easier for the existing vehicles of Tata Motors. It may also provide a fillip to its passenger car segment as it can make use of JLR’s strong distribution network. Given that Ford will also provide engineering and R&D support, the company will benefit from the access to latest technology.

Cues for Investors

It is not clear as yet as to how the deal is to be financed. Tata Motors, had a fortnight ago, announced plans to raise $1 billion (Rs 4,000 crore) by the issue of ‘appropriate securities’ in the Indian/Foreign market. Given the increased cost of funds in the global and Indian markets in the past few months, the ambitious expansion plans that the company has for the domestic market; and the burden on profitability that the acquisition may create, investors need to be watchful on the results over the next two-three years.

Besides, as this fund-raising may only partially cover the deal value, investors need to look for a possible equity dilution that may occur if the company decides to raise money by a preferential allotment to promoters.

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