JLR deal seen long-term positive
Financial Express — March 27, 2008

The $2.3 billion deal where Tata Motors has picked up Ford’s Jaguar and Land Rover in all cash acquisition deal could well be a strong bargain, reckon analysts as details of the deal started to pour in. Clearly, the fact that global size brands with revenues of $14 billion was picked up at a small fraction, seems to place the deal on a different plane.

Usually, automobile Companies are available for twice their revenues. Tata Motors itself trades at three times its estimated revenues of $3.04 billion for FY09. The current deal size is just about 17% of the revenues.

While the details of the funding are yet to be made clear, the management has mentioned that the deal will be financed by a bridge loan of around $3 billion, which will be replaced by long term debt and equity. The company will also be contemplating divesting some of its holdings in group Companies, and this could remove some of the stress of interest costs.

However, being a cash-rich company, Tata Motors will be in a position to get competitive rates. It has around Rs 1,100 crore worth holdings in Tata Steel itself. Also, Tata Sons holds around Rs 5,700 crore in the company, which can be utilised for the funding.

However, the company’s biggest challenge, says an auto analyst, would be to manage operations of the two big brands. Explains Piyush Parag, auto analyst at Religare Enterprises, “The two brands, Land Rover and Jaguar, are currently in losses. Of the two, Land Rover is doing brisk business and is expected to recover from losses in FY09. However, Jaguar is expected to take a longer time to break even.”

Refuting this, C Ramakrishnan, chief financial officer, Tata Motors, maintains that the combined entity of Jaguar and Land Rover are profitable, while not divulging exact details.

The pressure on interest rates will remain as the total borrowing of the company’s other expansion plans, including its plans with Fiat in Maharashtra are estimated to be in the range of Rs 4,000 crore. While the debt to equity after this expansion plans will remain healthy at 1.15:1, the interest costs could eat into earnings. Parag adds, “The interest burden is expected to rise in the medium term. And hence, there is apprehension about the deal making an immediate positive impact on Tata Motors’ earnings.” Analysts will re-work the numbers as more clarity appears.