TATA acquires Jaguar & Land Rover Team Mates Ajay Singh Gaurav Shahare Gourav Palit Krishnan Lakshmikanthan Maninder Bisen
Jargons defined Bridge Loan > A short-term loan that is used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow. The loans are short-term (up to one year) with relatively high interest rates and are backed by some form of collateral such as real estate or inventory Debt Free Cash Free > Cash-free, debt-free transaction refers to the amount the buyer would pay if the seller had no debt and no cash on the balance sheet of the company Special purpose vehicle > Also referred to as a "bankruptcy-remote entity" whose operations are limited to the acquisition and financing of specific assets. The SPV is usually a subsidiary company with an asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt. A corporation can use such a vehicle to finance a large project without putting the entire firm at risk.
Tata Motor’s Growth Story 1984: India’s 1st LCV (407 truck) Growth Strategy To consolidate position in thedomestic market and expand international footprint through development of new products by
Acquisitions and strategic collaborations to gain complementary capabilities
1996: India’s 1st SUV (Safari) 1998: India’s 1st Passenger Car (Indica) 2004: Acquisition of Tata Daewoo, Korea 2005: India’s 1st mini-truck (Ace) 2005: Acquisition of stake in Hispano, Spain 2007: Formed an international JV with Fiat 2007: JV in India with Marcopolo of Brazil 2007: JV in Thailand with Thonburi 2008: People’s car – Tata Nano 2008: Acquisition of Jaguar Land Rover Source – Tata motors View slide
The Land Rover 4x4 SUV - a premium all-terrain vehicle, with portfolio of 5 brands 1 2 3 4 Ford acquired LR from BMW in 2000 for $2.75bn Recorded highest volume sells in 2007 with 18% growth Increasing global presence with success of Rover-Sport 5 Land Rover working with Jaguar for sharing common technologies like engine, manufacturing facility, etc. Source – ENAM Securities Pvt. Ltd
The Jaguar The premium luxury car brand with portfolio of 5 models 1 2 3 4 Acquired by Ford in 1989 for $2.5bn Ford is believed to have invested over $10bn to improve production facilities Jaguar has been struggling to find a mass market model over the last few years Source – ENAM Securities Pvt. Ltd
Why FORD Sold JLR? 1 2 3 4 Losses at JLR stood at $12.6bn in 2006 High manufacturing costs in the UK EU emission norm change in 2012 - a major hurdle for all manufacturers With a slowdown, the luxury car and SUV markets are expected to soften 5 Expected R&D spend of JLR to be in excess of USD 1.5bn over the next two years Source – WSJ, Economist
Chronology of Events
June 2nd 2008: Share price Tata motors dropped by 6% to Rs 595.15 on the BSE following the company’s fund raising plan to acquire jaguar & Land rover.
June 3rd 2008: Ford Motor Co. officially sold jaguar and land rover to Tata Motors with about $2.3 billion.
Jun 4th 2008: Global credit ratings agency Moody's downgraded Tata Motors Ltd from Ba1 to Ba2.
Jul 31st 2008: Tata motors quarterly profit fell by 30% due to increase in the input costs.
Dec 24th 2008: Tata Motors pumped tens of millions of pounds of emergency funding into jaguar land rover to save it from liquidity crisis during downturn.
Why TAMO Acquired JLR ? Long term strategic commitment to automotive sector 1 2 3 4 4b 5 6 Opportunity to participate in two fast growing auto segments (premium and small cars) and to build a comprehensive product portfolio with a global footprint immediately Increased business diversity across markets and product segments Unique opportunity to move into premium segment with access to world class premium brands Land Rover provides a natural fit above TMLs Utility Vehicles/SUV/Crossover offerings for the 4x4 premium category 4a Jaguar offers range of “Performance /Luxury” vehicles to broaden the brand portfolio Sharing of best practices between JLR and Tata Motors in future Long term benefits from component sourcing, low cost engineering and design services Source – Tata Motors
Re-Financing Plan US $3bn Bridge loan USD 1.8bn through rights issue USD 500mn equity overseas USD 700mn balance through debt + + USD 550mn rights issue of equity share USD 500mn rights issue of ‘A’ equity share USD 750mn rights issue of 5yr 0.5% CPS
Above equity issues will increase the existing equity capital by 35%; in the event of CPS conversions between 2011-2013 additional increase of 12% is estimated.
In 2009, Tata Motors and Jaguar Land Rover tied up $250 million in distribution financing from GE Capital, in a unique financing deal, a first of its kind in Europe. This arrangement was for working capital and is not linked to refinancing of debt raised to acquire JLR.
As a result Source: Tata Motors, Enam.com
What has TAMO Paid for
Valuation of JLR TAMO + JLR Based on EV of 2.3 Bn$ Source : Deutsche Bank Research
TAMO : Global Peer group Valuation Comparison TAMO + JLR EV/Sales : 0.48 EV/EBIDTA: 5.5 Source : Deutsche Bank Research
TAMO + JLR : Leverage and Valuation Ratios Source : Deutsche Bank Research
TAMO + JLR : Pro forma P&L 50bps improvement in JLR’s operating margin in CY2009 Source : Deutsche Bank Research
TAMO + JLR : Pro forma Balance Sheet Source : Company, Deutsche Bank Research
Cost Synergies TATA Technologies:-
Provides services like supplier programs , Consulting services and global sourcing.
Provides services like engineering design & manufacturing solutions.
Automotive division account for 15% revenues.
TATA Steel – Corus:-
Leader in Automotive grade steel in European markets.
Enjoys “Q1” supplier status with Ford.
TATA Auto Component:-
Flagship company of TAMO’s ancillary business.
Expert in Manufacturing , Engineering, Supply Chain management.
Cost Synergies (Contd.) Considerable Reduction in labor & material Cost
Revenue Synergies In the Long run, TATA Motors’ footprint in South East Asia Will help JLR diversify their geographic dependence from US(28% of volumes) & Western Europe(55% of volumes).
May 31st 2011: Tata heating up to compete with SUVs XC 60 from Volvo India, Audi Q5 from Volkswagen AG and BMW's X3 – Tata Motors plans assemble JLR in India.
Jul 19th 2011: Tata plans to start assembly line in China.
Jul 20th 2011: Tata JLR eyes joint engine development . Tata’s Pune plant started building the land rover freelander. So far , the engines were produced by Ford.
Sep 20th 2011: 355m facility for JLR engine to be built in wolverhampton. This will provide a boost to employment rate and would benefit as much as 150 companies and is estimated to create 2000 positions within supply chain.
Why was the deal speculated for failure ?
Ford who is known to be a leading Automotive manufacturer could not bring about a change in Jaguar and Land Rover since 1989 and 2000 (BMW).
Also more funds will be dispensed to bring about a renovation over the management of the firms.
TATA had already incurred huge debt in-order to develop Nano the Rs. 1 Lac Car. Singur Crisis had drained about $300 Million.
The amount of loan needed would ask for multiple banks to lend significant amount.
The economic downturn was anticipating the deal to be non-profitable in near future.
Future technology will have to incorporate alternative energy such a Hybrid Engines as part of Green Technology. Tata owned none such technologies.
Indian company has not launched any successful automobile in the global market.
Why was the deal speculated for failure ?
Over the next 10 months, TATA incurred a loss of $ 468M, seemed the loss spree would continue like it had been with ford.
After Acquisition, TAMO posted a loss of $67 million for the quarter, which was $147M profit, for the same quarter, last year.
Tata has sunk almost $2billion for operations, R & D of Jaguar and Land Rover
Land Rover though a fast moving automobile had its demerits. These machines were massive gasoline guzzlers. To contain the expulsion of CO2 (Should be less than 120 g/km) was a huge expense in itself.
TATA has already an existing debt of $6Billion in its books of accounts.
Portfolio has the cheapest car even made in the history of Automobile. The speculation was that this would damage the brand name of Jaguar and LR.
However, the acquisition was given a clear note. i.e., There were no controversies as conveyed by PHD Chamber of Commerce Industry.
TATA Motors : Success Spree
Tata Motors has managed to sell a whooping 244,000 Jaguar & Land Rover cars globally in 2010.
In Jun 2011, 80 percent or $1.7 billion of its bumper $2.04 billion annual profits came from the JLR unit alone.
TATA has successfully made its mark in Luxury car segment with a global presence with high technology automobile.
Almost $1.1 Billion invested on R & D for lining up the fleet for 2011 spectacular launches of Luxury Segment car.
4 New models rolled out from Land Rover in 2010 with latest technology .
4 New Models rolled out from Jaguar Line up. Starting from £29900 – £75500.