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Tata Motors: JLR in the kitty - Views on News from Equitymaster
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Tata Motors: JLR in the kitty
Mar 27, 2008

Its official. In what could be termed as an event that would mark the economic power shift in the global auto industry, ‘Jaguar’ and ‘Land Rover’ (JLR), two iconic auto brands will now form a part of the Tata Motors stable. Ford, one of the world’s leading automobile manufacturers was strapped for cash and needed some money desperately. It decided to put JLR on the block and after months of speculations, the news was finally broken yesterday that the ownership of the two brands would indeed be passed onto Tata Motors for a total consideration of US$ 2.3 bn. (approximately Rs 92 bn). However, the amount that Ford will net is in the region of US$ 1.7 bn (approximately Rs 68 bn) as the company has decided to pump in US$ 600 m (approximately Rs 24 bn) into the under funded pension fund of JLR once the deal is closed. As a part of the transaction, Ford will continue to supply Jaguar Land Rover for differing periods with powertrains, stampings and other vehicle components, in addition to a variety of technologies, such as environmental and platform technologies. Ford also has committed to provide engineering support, including research and development, plus information technology, accounting and other services.

In addition, Ford Motor Credit Company will provide financing for Jaguar and Land Rover dealers and customers during a transitional period, which can vary by market, of up to 12 months.

Benefits of the deal to Tata Motors
The global automotive industry is brutally competitive. India, by virtue of being in an important cog in the wheel of future growth cannot remain immune to it for long. Over the past few years, almost all of the world’s leading automakers have either set up shop here or have made announcements to that effect. These companies have come or will come armed with technologies that would have been very difficult for Tata Motors to match given that the company’s tryst with car manufacturing began only a few years back.

While the company has done well for itself in the passenger vehicles segment in the past, it has to be borne in mind that the Indian market had very few players so far, a scenario that is likely to change fast. And it isn’t that the company was resting on its past laurels. Anticipating competition, the company had begun scouting for state-of-the-art technology and the recent tie up with Fiat was a result of this effort. But since Fiat also provides technology to some other players in the Indian market and also has its own presence, issues related to conflict of interest or intellectual rights might have cropped up in the future. The company needed something that it would call its own and not worry too much about competition related issues. Enter JLR. With this acquisition, the company will get access to technology that can compete with the best in the business in one fell swoop. What more, Tata Motors will also get to use the enormous distribution network of these brands, which will help it in achieving its dreams of becoming a global car maker.

Is the valuation reasonable?
As far as the valuation of the deal is concerned, we believe it will be a mistake if we try to justify the valuations based on the JLR’s current balance sheets and P&L statements. The entire objective of Tata Motors behind the acquisition must have been to leverage the technology and R&D strengths of JLR and not focus too much on the turnaround and the profitability of the two brands. This further becomes evident from the fact that Tata Motors will not tinker much with the current employee strength of the company and also not attempt to transfer any of the manufacturing activity back home.

One major comfort that can be drawn vis-à-vis the fairness of the valuations is the fact that Tata Motors is paying less than half of what Ford paid for the same brands when it acquired them a few years back. However, whether the deal remains value accretive to Tata Motors’ shareholders will only become clear in the distant future when Tata Motors’ goes all out in launching new products based on the JLR technology and uses their distribution networks. So for the time being, we are not getting very gung ho on the shareholder value creation part of the deal and believe it to be a drain on value in the near term. On the financing aspects, we believe the company would resort to a mix of debt and equity in order to raise funds for the deal and although it might put a strain on the company’s balance sheet in the near term, we do not expect the company to run into huge problems.

To conclude, while the deal does a world of good to the company’s ability to survive the competition onslaught and its long-term growth prospects, whether this really translates into shareholder value creation remains to be seen. We thus advice investors to exercise caution and do not make any investments at the current juncture. We would update the research report once the full details are out.

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