6 Essential M&A Cases: Tata Group buys Jaguar Land Rover

The Tata acquisition of Jaguar Land Rover is a superb example to include in research notes on takeovers and mergers. At the time (early 2008), Tata’s investment in JLR seemed to be poorly timed and there were many critics who questioned the strategic logic of the move as well as its timing. Shortly after the takeover, demand in the global market for luxury cars collapsed as a result of the financial crisis and Tata was forced to refinance to support its investment.

Several years later, however, the takeover appears to be a compelling example of a successful acquisition which is generating substantial shareholder value for Tata as well as continued support from JLR’s many stakeholder groups in the UK.

Background

Jaguar Land Rover (JLR):

- Jaguar Cars bought by Ford in 1989

- Land Rover bought by Ford from BMW for $1.4bn in 1989

- A difficult relationship between the UK firm and its US owners

- Jaguar fell into heavy losses whilst owned by Ford (reaching up to $600million per year)

- However, Ford invested heavily in new model development

Tata Group:

- One of India’s largest private conglomerates - used to investing in the UK

- Bought Tetley Tea in 2000

- Bought Corus Steel - a big supplier to JLR - in 2007

- Tata Motors - was already India’s third largest car-maker, but struggling with a poor image and hampered by rising raw material costs

The Deal

- Ford sells JLR to Tata for in March 2008 just over £1bn - just a few months before a collapse in global demand in the international car market

- Tata financed the takeover with $3bn of new long-term loans

- The price paid by Tata was approximately half of what Ford paid to buy Jaguar and Land Rover.; + Ford had continued to incur heavy losses in Jaguar as it failed to turn the business around.

- The deal took over a year to agree - which may have helped with the post-merger integration. Tata recognised that it would continue to need support from Ford who are a main supplier of car components to the two brands.

- No significant change proposed to the businesses by Tata. They claimed that staff, trade unions and the UK government had been kept informed about the proposed takeover and supported the move.

- The deal has been endorsed by trade unions, which secured a commitment from Tata to continue with JLR’s production plans until the end of 2011. This includes development of new models.

Key drivers of / motives for the takeover

- Acquiring JLR would provide significant potential for revenue synergies, including giving Tata greater international distribution, broader product range and better customer service skills

- Tata gains access to world-class engineering capability

- Strengthens relationship between Tata’s steel and motoring businesses

What happened next?

Significant slump in new car sales in late 2008 as a result of the credit crunch; Tata had to refinance in order to keep JLR solvent. UK government considered a financial aid package, indicating the strategic importance of JLR to the UK economy

February 2010: Tata secures a £340million loan from the European Investment Bank to support JLR through recession

May 2011: Tata announces £5b five year investment programme in JLR - focused on new product development & new equipment at JLR three UK plants + investment in a planned factory in China. JLR also to link closer with Tata Steel to provide new lightweight steel alloys for new car models.

November 2011: JLR announces 1,000 new jobs a Land Rover plant in Solihull boosted by rising demand for SUVs in China, Russia, India and Brazil.

February 2012: Soaring sales of Jaguar and Land Rover cars have helped Indian firm Tata Motors to a huge rise in profits (up 41% on 2010). JLR arm saw sales rise 37%, helped by selling 32,000 of its new Range Rover Evoque. China overtakes the UK as JLR’s biggest market.

March 2012: JLR and Chery Automobile agree a joint venture that should pave the way for production of Jaguar and Land Rover cars in China.

April 2012: JLR announces that it will build a successor to its previous sports cars called the F-type at its factory in Birmingham.

Other evidence of success / failure?

Some evidence about the overall success of the JLR takeover:

http://www.forbes.com/sites/kenrapoza/2012/04/18/for-tata-motors-jaguar-a-gold-mine/

2012: Share price of Tata Motors makes it the-best performing major car maker (up 70%)
JLR worth $14 billion, according to the average estimate of three analysts surveyed by Bloomberg (compare with takeover price of approx

http://www.economist.com/node/21548965

“There has been one triumph; JLR, where earnings have soared despite a near-death experience after the 2008 crash. A chunk of the recovery is due to the fall of the pound: JLR’s plants are mainly in Britain, though it sells largely in other countries. But that is not the whole story. Under Tata’s ownership JLR has also launched a killer product, the Range Rover Evoque, and cracked emerging markets, not least China. “

Key quotes about the deal

Investment analyst (FT)
“This deal not only gives Tata Motors a complete design portfolio in terms of having luxury and value-for-money cars. It also brings them up to a completely different level in terms of being a global passenger car company.”

Ian Callum (Director of Design, Jaguar): 2008
“We have shown Tata our new model lines and the planned product cycle. The two national cultures appear to fit together very well and Tata is being very respectful about what we are doing.”

Peter Marsh (FT)
“The integration between the UK vehicle brands and Tata Motors, the Indian company’s automotive division, will be marked by a “softly, softly” approach characterised by Tata’s interest in maintaining the goodwill of existing managers and keeping most working practices intact.”

Ratan Tata (Chairman of Tata)
We are very pleased at the prospect of Jaguar and Land Rover being a significant part of our automotive business. We have enormous respect for the two brands, and we will endeavour to preserve and build on their heritage and competitiveness, keeping their identities intact. We aim to support their growth, while holding true to our principles of allowing the management and employees to bring their experience and expertise to bear on the growth of the business.”

Alan Mulally (President and CEO of Ford)
“Jaguar and Land Rover are terrific brands. We are confident that they are leaving our fold with the products, plans and team to continue to thrive under Tata’s stewardship. As part of the transaction, Ford will continue to supply Jaguar Land Rover with key components. Ford has also committed to provide engineering support, including research and development, plus information technology, accounting and other services.”