Deals and IPOs

Tata Motors to Buy Ford Brands for $2.3 Billion


India's Tata Motors Wednesday announced a $2.3 billion deal to buy Jaguar and Land Rover from Ford, in a transaction that gives the emerging Indian automaker a model line-up ranging from ultra-cheap to high-end luxury.

Ford announced today that it is cutting production by 21% resulting in downtime at the assembly plant in St. Thomas Ontario on Friday Aug. 18, 2006. Ford Motor Co. announces sharp cuts in its North American production that would force it to partially shut down plants in the U.S. and Canada in the fourth quarter. (AP Photo/Canadian Press, Geoff Robins)
Geoff Robins

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 its Indian rival, Mahindra & Mahindra, 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 storied British nameplate into a higher-volume brand as losses mounted. Ford paid $2.75 billion for Land Rover in 2000.

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 engineering support and financing for dealers for up to a year, both companies said.

With the pension payment, Ford will net about $1.7 billion, in line with expectations.

Tata Motors, India's top bus and truck maker and its No. 3 car maker, has been in talks with Ford since it was chosen as the front-runner to buy British-based Jaguar and Land Rover earlier this year.

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."

Merkle said Ford could now turn its attention to reviving its Lincoln luxury brand, part of its three core brands in North America.

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.

Ford said Volvo lost money in 2007 and wrote down its value by $2.4 billion in January.

Shares in Tata Motors closed down 0.1 percent at 679.40 rupees in a Mumbai market. Ford shares were unchanged at $6.00 in trading 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 will 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 the credit-market crisis has raised borrowing costs and deterred deal-making.

Standard & Poor's placed Tata Motors on review for a possible downgrade in January from its current high-yield "BB+" rating, citing the potential increase in its debt load from the acquisition of Jaguar and Land Rover.

Tata Motors, which has a market value of $6.5 billion, is a member of the Tata Group, which comprises 98 companies in sectors including steel, salt, software, energy, cars and trucks, communications and chemicals.

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.

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.

After leveraging all of its assets including its blue-oval logo in 2006 as part of a $23 billion borrowing program, Ford ended 2007 with $34.7 billion in cash, marketable securities and some short-term assets.