KEY POINTS:
Tata Group just can't get enough new acquisitions. Less than a year after its audacious £6.7 billion ($18 billion) takeover of Corus, formerly British Steel, India's largest private industrial group has its sights on two more British brands: Land-Rover andJaguar.
Insiders say Tata Motors, the conglomerate's automotive arm,
is the front runner in the US$1.5 billion ($2 billion) auction of the car makers, which are being sold by their ailing US parent Ford.
Said one source: "They are definitely the favourites at this point."
If Tata acquires the luxury marques, it would be a feather in the cap of Ratan Tata, the septuagenarian who has led the company since 1991 and overseen its expansion abroad.
The auction can be seen from many angles. From Ford's perspective, it is an admission of failure. It bought the companies in the hope of challenging luxury car makers such as BMW. Now it will absorb a massive loss to get rid of them.
For Britain, the predicament of Land-Rover and Jaguar - the former just breaks even or is slightly profitable, the latter loses money - can be seen as another example of the slow, dwindling of industrial groups that have failed to keep up with the globalised economy.
"It's the classic British problem. They make highly recognisable cars that have very good engineering, but they are sold in tiny numbers," said Hilton Holloway, of Autocar.
And for India, the possible deal is further evidence of the evolution of many of its larger companies as they strive to move up the food chain, from their traditional strengths as cheap service providers and manufacturers to providers of higher-end, higher-value design and consulting.
Tata is the most respected and most aggressive of this breed.
After expressing his initial interest in Land-Rover and Jaguar, Ratan Tata has said little specifically about the marques. His recent public comments have been restricted to his respect for British automotive prowess.
"We hope to have a greater presence in the automobile field in the UK," he said recently.
In Britain, Tata has been at this for a while. It was 100 years ago that the firm took its first tentative step outside its native India when it opened a modest trading office in London.
Its acquisition of Tetley Tea in 2000 for US$435 million was the largest foreign acquisition by an Indian company up to then. When it beat Brazil's CSN for Corus in January, the £6.7 billion price tag set a new high-water mark for Indian buyers.
Today Britain is its single most important foreign market and roughly a quarter of Tata's US$48 billion in annual revenue comes from there. It employs 30,000 people in the country.
Some have wondered if the acquisition of a pair of legacy, high-end carmakers with heavy cost bases fits with Tata Motors' strategy of making affordable cars for the developing world.
Next year, the company expects to launch its "one lakh car" - one lakh is 100,000 rupees, which equals about $3350 - which it hopes will revolutionise the car market not only in India but abroad as well.
Sam Mahtani, head of emerging markets equities at F&C Investments, said: "This is really a major change in terms of that particular strategy, so it would be a major deal if they take it. The market is asking the same questions: Can they turn these operation around, going into different markets, with slower growth and more competition, and very big competitors?"
Tata Motors shares on the Bombay stock exchange have performed less well than their peers since its interest in the British companies was revealed.
Given the weakness of the US dollar, the currency in which sales are recorded, Land-Rover and Jaguar are in a particularly perilous state as they pay for production in pounds.
Yet as Tata seeks to expand into new markets, the expertise and, perhaps equally importantly, a well known brand, would give it a crucial entree.
Tata is bidding against three American private equity firms: One Equity Partners, the buyout arm of JPMorgan Chase, Ripplewood Holdings of New York, and TPG Capital. All of them would have to raise significant amounts of debt to finance a transaction.
Given the poor state of global credit markets, and doubts about lending to a pair of struggling carmakers that would end up as standalone entities rather than as part of a larger parent, the financial buyers are at a distinct disadvantage to Tata.
As a trade buyer, Tata already has a significant manufacturing base it can draw on. Its unique ownership structure also helps. Tata Sons, the main holding company, owns stakes of varying sizes in 23 publicly listed Tata companies. Tata Sons is in turn two-thirds owned by two charitable foundations endowed by members of the Tata family.
Tata Motors could use a combination of its own cash or debt and cash from Tata Sons, a formula it used to buy Corus, to finance the takeover. "They can just write a cheque. The private equity boys are going to have a harder time raising debt," said the source.
The Transport and General Workers Union is understood to be more comfortable with the idea of Tata taking over the companies than it is with the prospect of them falling into the hands of private equity firms. Tata's hands-off approach to its other British companies has helped. Though it has been less than a year since it took ownership of Corus, there has been no hint of plant closures. Tetley Tea has grown under Tata's stewardship and the same management team that was in place when Tata took it over in 2000 runs the company today.
Tata's long-standing partnership with Fiat is also crucial. It is understood that this year Fiat looked at buying Land-Rover but shied away because the price would adversely affect its credit rating. If Tata were to acquire the marques, Fiat could collaborate by providing components in exchange for a share of revenue. It might even buy a minority stake.
One of the major problems for Land-Rover and Jaguar is that because of the relatively small volumes they produce, the components are too expensive. The help of Fiat, which could, for example, provide some parts used on its Maserati models to Land-Rover, could reduce that burden.
- Independent
