Global Insight Perspective | |
Significance | Tata Motors has finally completed the deal to acquire Jaguar and Land Rover. It has also announced that the role of CEO of the two brands will be filled by David Smith. |
Implications | The finalisation of the deal should offer greater security for the two brands. However, questions remain over the long-term funding of the deal. |
Outlook | The next few years are likely to be tricky for Tata Motors and its newly acquired brands given the current economic and environmental climate. |
Tata Motors has finally completed the acquisition of the Jaguar and Land Rover brands from Ford. According to the Birmingham Post, a low-key ceremony took place at the brands’ corporate headquarters in Gaydon (United Kingdom), attended by the chairman of the Tata Group, Ratan Tata; Ford Executive Vice-President and Chief Financial Officer (CFO) Don Leclair; and Ford European Executive Vice-President Lewis Booth.
After the ceremony, Ratan Tata told journalists, "This is a momentous time for all of us at Tata Motors. Jaguar and Land Rover are two iconic British brands with worldwide growth prospects", adding that the automaker was "looking forward to extending our full support to the Jaguar Land Rover team to realise their competitive potential". He also said that his company recognised the significant improvements that had been made at the two brands and that it would continue this trend in the coming years.
New CEO Appointed
One of the first decisions taken by Tata has been the appointment of David Smith as chief executive officer (CEO) of the two brands; he had already been made acting chief executive following the death of Geoff Polites in April. Smith was appointed as CFO of Jaguar and Land Rover in March, but was formerly director of finance and strategy for Ford of Europe and the Premier Automotive Group (PAG), and has held numerous finance and strategy positions within Ford since he joined the automaker in 1983.
Outlook and Implications
The news that Tata has finally been handed the keys to Jaguar and Land Rover following the US$2.3-billion deal initially announced in March (see World: 27 March 2008: Ford Confirms Sale of Jaguar, Land Rover to Tata for US$2.3 bil.) will come as a relief for U.S.-based Ford following a difficult period of ownership of the two brands. Although the combined brands are said to be profitable, or at least close to this level, the automaker is thought to have spent a great deal on funding the pair. Given that it is now in a perilous financial position itself, the liquidity that will come from the US$1.7 billion-worth of cash that it will receive from the sale (as part of the deal it has contributed a further US$600 million to the employee pension plan) will be useful in shoring up its reserves, and will help ensure that it can focus its efforts on its "One Ford" plan.
The onus now will be on Tata Motors to ensure the survival of the two brands. Initially the acquisition will be paid for by a bridging loan underwritten by a group of financial institutions, but this will only last for around a year, and in the meantime the company will have to go out to the markets to secure more funding to pay down this short-term debt. Last week, Tata's board approved three separate rights issues amounting to 72 billion rupees (US$1.7 billion) that will be split between a 22-billion-rupee issue of voting shares, up to 20 million rupees of voting shares, and an issue of 30-billion-rupee-worth of five-year, 0.5% convertible preference shares. However, given the less-than-enthusiastic response to the deal from the financial community and the dilution of an already weakened share price base, it remains to be seen how Tata’s requests will be received.
Another area where it will come under pressure concerns future investment. With Jaguar having recently launched the XF sedan and the XK coupé and convertible before this, and Land Rover having brought out its latest-generation Freelander relatively recently as well, the two brands are relatively well placed at present to continue a programme of consolidation and growth. There are also replacement and revamping projects in the pipeline that will offer the pair stability in the coming years, and with Land Rover having shown off its LRX concept and Jaguar rumoured to be reviving a small sports-car project, the brands would seem to have a future, at least on paper. However, before any of these projects are brought to market, it will have to face up to the impending stricter carbon dioxide (CO2) legislation from the European Union (EU). Although the deal with Ford includes technical assistance, particularly with regards to hybrids, the brands are heavily weighted towards large vehicles, with Land Rover focused on sport utility vehicles (SUVs), a category that appears to be the main target of the EU and U.K. legislation. This makes such vehicles increasingly challenging to own, both financially and politically.
Before this, however, Tata and its latest acquisitions will need to negotiate the worst effects of a downturn in many of its main global economies; this downturn is likely to affect luxury brands the most as customers seek lower-cost vehicles. In this case, there could be an increased focus on developing markets, where demand for such vehicles appears to be booming, particularly in regions that are rich in natural resources. However, the pair will need to go head to head with many rivals vying for the same customers, especially those from Germany, such as BMW and Mercedes, which now have impressively broad ranges catering for many niches.
Ultimately, the success of the acquisition will depend on Tata and the preparations it has made for ownership. Tata is well known in business circles for its successful integration of companies under its umbrella, and its mentality of nurturing businesses. This has been the case with companies such as steel-maker Corus, truck-maker Daewoo, and Tetley Tea. However, whether it will enjoy the same degree of success with Jaguar and Land Rover given the current climate remains to be seen.