Image: Chairman of Indian automaker
Aijaz Rahi  /  AP
Many investors and automotive industry analysts question whether a bid for two luxury brands, Jaguar and Land Rover by India's Tata Motors, maker of workhorse trucks and low-end mass market cars, would make much business sense. Tata Group Chairman Ratan Tata confirmed in August that he is clearly interested in entering the competition for the iconic Britain-based automakers, which have been put on the auction block by financially troubled Ford Motor Co.
updated 9/17/2007 4:50:35 PM ET 2007-09-17T20:50:35

For this former British colony, an Indian takeover of Jaguar and Land Rover would be a boost to local pride and a sign of India’s economic rise.

But many investors and automotive industry analysts question whether a bid by India’s Tata Motors — maker of workhorse trucks and low-end mass market cars — for the two luxury brands would make much business sense.

Chairman Ratan Tata confirmed last month that he is clearly interested in entering the competition for the iconic Britain-based automakers, which have been put on the auction block by financially-troubled Ford Motor Co. Several U.S. private equity firms are also expected to submit bids.

The graying, distinguished Tata has said such an acquisition would help bring global visibility to his group — a sprawling conglomerate that makes everything from automobiles to steel and software, and a name that until recently was little-known outside India.

Tata Steel made a splash in January when it won a bidding war to buy Anglo-Dutch steel maker Corus Group PLC for $12.1 billion. That deal, India’s biggest foreign acquisition, highlights the country’s recent outward expansion into the global economy.

But while the Corus acquisition was widely seen as a good match — and since appears to be paying off — experts don’t see similar synergies in a Tata Motors takeover of Jaguar and Land Rover.

Long a giant in truck and bus manufacturing, Tata has only about a decade of experience selling cars — and most recently, has grabbed headlines with its plan to make an ultracheap car costing just about $2,400. The company has been successful selling into the burgeoning Indian market.

Jaguar and Land Rover are luxury brands that cater to a small percentage of customers and have a limited distribution network. What Tata needs more, if it wants to reduce its dependence on Indian buyers, is a large overseas sales network that targets the mass market, experts say.

“It makes no sense at all,” said S. Ramnath, an auto analyst at Mumbai-based brokerage firm SSK Securities Ltd. “It’s passion that is behind this move.”

Morgan Stanley analyst Balaji Jayaraman called such an acquisition “value-destructive given the lack of synergies and the high-cost operations involved,” in a note to clients.

Still, people tracking the matter say Tata Motors has a good chance of bagging the bundled sale of Jaguar and Land Rover brands. A possible bid from the Indian automaker puts it in competition with U.S. private equity firms, including One Equity Partners LLC. and Ripplewood Holdings LLC that each have partnered with former Ford executives.

Morton Pierce, head of mergers at the New York-based law firm Dewey Ballantine LLP., thinks Tata has an edge because U.S. private equity firms might find it difficult to raise funds for such acquisitions in the midst of a credit shortage sparked by trouble in the mortgage market.

An executive with an European consulting firm with close ties to Jaguar said Tata Motors has a high probability of winning if it bids. The executive didn’t want to be identified because his association with the acquisition target.

Ford Motor Co., which lost $12.7 billion last year, has been looking to sell Jaguar and Land Rover, which have been hit by unfavorable exchange rates and high production costs in Britain. The company doesn’t break up its earnings for these units, but has said it never made money from Jaguar since buying it in 1989. Land Rover is performing better due to new models introduced last year.

Ford has not said how much it wants for the combined units, but analysts have estimated they could be worth about $1.5 billion.

If the acquisition swings in favor of Tata Motors, it would surely add to the national pride of many Indians. They see buyouts like these boosting India’s image abroad — the excitement often gets amplified when the acquisition target is in Britain, which ruled this country for two centuries.

“Why do we have to always weigh everything in terms of money? It’s about image, respect. I think the idea is good,” said Rabindra Tripathy, a retired government bureaucrat.

Tata, the chairman, said in a recent television interview that Jaguar and Land Rover could help expand Tata Motors’ access to markets overseas and reduce its dependence on Indian sales, which currently account for more than 90 percent of its revenue. “It is to give ourselves scale, to give ourselves global reach,” he said.

Indian companies, including the Tata Group, have often tried to improve profitability of acquired businesses by shifting some production to India, where wages and raw material costs are low. But that option may not work out with Jaguar and Land Rover.

“Indian auto parts suppliers do not have the technical capabilities to make such a transition,” said the Morgan Stanley note. “Even if they had a production set-up in India, they would need to import the auto parts.”

Moreover, a possible acquisition of Jaguar and Land Rover could upset Tata Motors’ plan to spend up to $2.9 billion in expanding production, including investment in the $2,400 car project, said Ramnath at SSK Securities.

But Ratan Tata is no stranger to this sort of criticism, and has had a long record of proving his critics wrong.

Tata Steel’s earnings report for the April-June quarter showed the Corus acquisition has begun to pay off faster than most analysts expected. Its stock has since bounced back and risen to an all-time high.

The group’s tea unit was also criticized for paying too much — $677 million — for a 30 percent share in New York-based flavored water company Energy Brands Inc. in August last year.

But Tata had the last laugh when Coca Cola Co. bought Energy Brands nine months later — paying $1.2 billion for Tata’s stake.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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