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Jaguar, Land Rover: Synergy for Cerberus?

Cerberus Capital Management, the private equity firm acquiring 80 percent of Chrysler Group from DaimlerChrysler, has spoken to Ford Motor about acquiring Jaguar and Land Rover brands.
/ Source: Business Week

Cerberus Capital Management, the private equity firm that is in the process of acquiring 80 percent of Chrysler Group from DaimlerChrysler has also spoken to Ford Motor about acquiring the automaker's Jaguar and Land Rover brands, according to executives familiar with the talks.

Those talks, say the executives, have not resulted in a firm offer for the British luxury brands. Ford has made it known that it is shopping the brands. Merrill Lynch has estimated that the two brands could bring Ford $1.5 billion, though some estimates have been as high as $8 billion.

At $1.5 billion, Ford would be taking a bath, having paid in excess of $8 billion for the two brands, in addition to billions of losses incurred by the two businesses. Ford has owned Jaguar since 1989 and Land Rover since 2000. For the year ended Dec. 31, 2006, Land Rover sold 6,014 units, down 13 percent from 2005, and Jaguar sold 1,553 units, off 36.5 percent, according to Automotive News.

Two interdependent brands
In Jaguar and Land Rover, Ford acquired antiquated manufacturing facilities in Britain, onerous labor pacts, and a bloated workforce. It has made some progress, but Ford's Premier Auto Group, which also includes Volvo, lost money last year, with most of the losses coming from Jaguar. Ford says that Land Rover is currently operating at a profit.

Ford is looking to sell Jaguar and Land Rover as a package since the engineering, purchasing, and distribution of the two brands have become interdependent as Ford has tried to find efficiencies running the businesses. Jaguars and Land Rovers are even manufactured at a common plant today.

Interest in the British brands by Cerberus would likely stem from the belief that they could strike more favorable labor deals in Britain, and even move manufacturing to less expensive factories. There isn't much to be gained in combining Chrysler with Jaguar, though it's possible that Chrysler's Jeep and Land Rover could find synergy.

Plenty of reasons to sell
British press reports had said last week that British private equity firm Alchemy Partners was raising money for a bid. But the firm's management downplayed its interest late last week. Renault and Fiat are also known to have looked at Jaguar and Land Rover.

Ford said Monday that it missed its target of cutting material costs by 5 percent in May. In addition, Wall Street worries that Ford is burning cash too fast as it restructures. The company's retail market share has been lagging, and it has dramatically cut sales to rental car fleets. The $1.5 billion to $2 billion Ford might get from a sale of Jaguar would help. But the real reason to offload the brands is to eliminate the risk of further losses.

Citigroup analyst Jon Rogers says a sale of Jaguar and Land Rover could benefit Ford as the two divisions are not at the core of the automaker's overall business and cash from the sale could be used to accelerate its North American restructuring. Another possible use of cash could be funding for the United Auto Workers-managed health-care plan, says Rogers, who has written that Ford could get as much as $8 billion for the two brands if it doesn't unload the businesses at fire-sale prices. By its own estimate, Ford's North American unit will lose money until 2009 and run through $17 billion cash in the next three years.

CEO Alan Mulally, who arrived at Ford last September, has made it clear to colleagues that he is no fan of the Premier Auto Group. Ford sold off Aston Martin from PAG last March to a group of investors led by David Richards for $848 million. The automaker, according to some published reports, has even had talks with BMW about selling Volvo to the German automaker. But both Ford executives and BMW have refuted those reports.

Life after PAG
When Ford clears out Jaguar and Volvo, it will face an uncertain future in the luxury car business. Ford's Lincoln brand is only a factor in the U.S. and Canada, and not much there relative to General Motors' Cadillac, BMW, Mercedes-Benz, and Toyota Motor's Lexus. Volvo is viewed as a premium brand, but not luxury.

Part of Ford's restructuring plans include reducing the number of far-flung dealers it has selling Fords in one retail channel and Lincoln Mercury vehicles in another. An idea that is being explored, according to one Ford executive, is to shut down Mercury and sell Fords and Lincoln in one channel. A second distribution channel could be Volvo and Mazda. Ford owns 37 percent of Mazda Motor and controls the company's management.

But Cerberus has so far made a point of scooping up struggling companies and wringing out profits from them. Ford couldn't make a go out of it with Jaguar and Land Rover, but maybe Cerberus would have better luck.