MUMBAI/DETROIT India's Tata Motors Ltd (TAMO.BO)(TTM.N) announced a $2.3 billion deal on Wednesday to buy Jaguar and Land Rover from Ford Motor Co (F.N), a transaction that gives the Indian automaker a line-up ranging from the world's cheapest car to some of its more expensive.
For Tata, which plans to launch the ultra-cheap $2,500 Nano or "People's Car," the addition of the profitable Land Rover brand provides an edge against Indian rival Mahindra & Mahindra Ltd (MAHM.BO), which had also pursued a deal with Ford.
Ford, for its part, gets to shed the money-losing Jaguar brand and gains a cash infusion at a time when the U.S. market is slumping and it is attempting to bounce back from combined losses of more than $15 billion over the past two years.
The sale price is roughly 40 percent of what Ford paid for the two brands. Ford acquired Jaguar for $2.5 billion in 1989, but failed to turn the British nameplate into a higher-volume brand. Ford paid $2.75 billion for Land Rover in 2000.
The deal also underscores the shifting balance of power in the global auto industry, where India and other emerging markets are expected to account for almost all of the growth in production over the next five years. None of the established European automakers, including BMW AG or Daimler AG (DAIGn.DE), pursued Jaguar and Land Rover.
They face a new competitor in Tata Group Chairman Ratan Tata, a jet-flying businessman, and his Tata Motors, India's No. 3 car maker and a unit of the far-flung Tata conglomerate that got its start making locomotives after World War Two.
Ford will contribute up to $600 million to Jaguar and Land Rover pension plans after the closing of the deal, expected in the second quarter. Ford will also continue to supply engines and related components, while providing financing for dealers for up to a year, both companies said. Ford will net about $1.7 billion, in line with expectations.
Ford is selling Jaguar and Land Rover to focus on turning around its money-losing operations in North America. Ford says it is on track to return to profitability in 2009, although its restructuring has been complicated by a U.S. economy at risk of tipping into recession and its own more limited success in buying out high-wage union workers, analysts have said.
"It certainly gives them a little bit of cash," Erich Merkle, an analyst at Michigan-based IRN Inc said of the impact of the deal on Ford. "It would stop the bleeding (caused by Jaguar) and allow them to focus resources."
With the deal, Ford disbands its Premier Automotive Group, whose only remaining brand is Volvo. Analysts expect Ford eventually to spin off the safety-oriented Swedish auto brand, but only after returning it to profitability.
Tata Motors shares closed down 0.1 percent at 679.40 rupees in a Mumbai market. Ford shares were down almost 2 percent at $5.90 on the New York Stock Exchange.
NOW THE HARD PART
Analysts have expressed concern about how Tata Motors would fund the deal and how it would fit the luxury brands into its stable of trucks, buses and cars, including the planned Nano, the world's cheapest car.
Tata has announced plans to raise $4 billion, which is expected to help finance the Ford deal and the manufacture of the Nano, which it unveiled in January.
The deal comes at a time when tight credit markets have raised borrowing costs and shut down deals. Standard & Poor's placed Tata Motors on review for a possible downgrade in January, citing the potential increase in its debt load from the acquisition of Jaguar and Land Rover.
The Tata Group has made a number of overseas takeovers in recent years, including last year's $13 billion buy of Anglo- Dutch steelmaker Corus by Tata Steel Ltd (TISC.BO).
Kimberly Rodriguez, principal at Grant Thornton, said Tata's track record with acquisitions showed it was willing to run brands independently and said it was likely to do the same with Jaguar and Land Rover, while pouring money into the brands in a way that Ford could not.
"It would be a much more core product line for Tata than it would have been for Ford," Rodriguez said. "Land Rover is critical because it allows them to compete with Mahindra. Jaguar may be a long-term play."
With a market capitalization of $12.8 billion, Ford has seen its value plunge by some 80 percent since 2001, when U.S. auto sales began trending lower.
Ford was advised by Goldman Sachs, HSBC and Morgan Stanley. Tata was advised by JP Morgan and Citigroup.
(Additional reporting by Soyoung Kim in Detroit; Editing by Steve Orlofsky/Andre Grenon)