If it’s a chilly wintry day in London, Ratan Tata must be in town buying classic-but-hoary old UK brands. In 2007, the Indian industrialist made headlines after overpaying (as Tata himself admitted) to snap up Anglo-Dutch steelmaker Corus for $12.9 billion. At the time, a banker involved with the deal remembered with a grimace the awful steel assets up for sale on the British side of Corus, noting that they were the worst he’d seen in a developed country in "a long, long time". Never mind: Mumbai-listed Tata Steel, the division that completed the Corus acquisition on January 31 2007 with the aid of a $2.66 billion bridge loan and $6.14 billion-worth of debt, saw its stock more than double in value in 2007 – although it has fallen back by a third this year, in line with the rest of the market.
Tata has been on the warpath again. In late March, Mumbai-listed Tata Motors completed its $2 billion acquisition of two classic British marques: Land Rover and Jaguar. (Tata Motors is actually completing the transaction via the group’s holding company and charitable institution, Tata Sons, which transfers most of the firm’s profits to needy causes. Ishaat Hussain, the finance director of Tata Sons, is in overall control of the transaction.) Tata is buying the two brands from Ford, which needs the capital to support its own sagging fortunes. Other names entered the bidding for the two Midlands-based automakers, including Indian group Mahindra & Mahindra, although the Mumbai-headquartered firm quietly withdrew its bid in January.
Loan finance
Sources say Tata Motors has signed a deal guaranteeing it $3 billion via a one-year bridge loan from Citi and JPMorgan. The remainder of the loan will be used as working capital and as further collateral to help Tata with the final rollout of its much-vaunted Nano car. The Nano was launched earlier this year at the Delhi motor show to much acclaim. Its price will nominally be set at one lakh rupees (Rs100,000 – $2,500) when it is rolled out on the Indian streets later this year, although auto vendors in Mumbai reckon the final purchase price will be closer to $3,000, rising to $3,500 in 2009.
Tata wanted to get everything done and dusted before March 31, the end of the 2008 financial year in India. Tata was also understandably keen to sign off on such a large transaction at a time when borrowers are faced with rising costs as the credit crisis worsens.
Surprisingly, union leaders have been fairly quiescent about the deal, with both Ford and Tata avidly seeking not to upset workers at the main production facilities in Solihull and Coventry. Ford is seeking to avoid destabilizing labour relations in the UK, which remains the US company’s second-largest market. For its part, Tata has underlined its desire to see the two brands continue to be manufactured and assembled in the UK. Earlier rumours had suggested that Tata Motors would either sell Jaguar, transfer production of the Land Rover back to India, or both.
Too much debt?
Analysts have mixed views on the deal. Many are uncomfortable with the level of debt being taken on by the firm, particularly since Tata Motors’ shares have fallen more than 20% since the company emerged as hot favourites to buy Land Rover and Jaguar. Ratings agencies in January warned that a high burden of debt could force them to downgrade Tata Motors, whose books are already squeezed by myriad other expansion plans. "I’m rather worried that they are stretching themselves too thin," noted one Mumbai-based analyst. "They’ve done it [raised capital] many times recently, and each time they’ve succeeded. But they didn’t have to raise cash in today’s markets."
Other analysts are more sanguine, pointing out that Tata Steel recently had its outlook raised by Moody’s Investors Service to stable from negative, after the steelmaker repaid $3.1 billion of bridge loans related to its acquisition of Corus.
The only main question remaining is how Tata slots two of the world’s oldest and most venerated car marques into a stable boasting some of the world’s least impressive family automobiles. The Tata Nano hardly prepares the firm for building hefty, powerful 4x4 Land Rovers. Nor do the rather flimsy Indica and Indigo saloons generate confidence that Tata can do the updated Jaguar E-type, expected on city streets by 2011, the justice it fully deserves. "An odd decision all in all," notes the editor of a prominent Mumbai-based auto magazine. "Tata’s going to have to get used to making really good products, all of the time. That’s not something it’s always had to do in the past."