TATA JLR DEAL.pptx

8/10/2019 TATA JLR DEAL.pptx

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Established in 1945 as a part of TATA Group

Largest Multi-holding automobile Company in India

4thlargest Truck and 2ndlargest Bus producer in the world

Operates in different market segments: passenger cars, commercial vehicles and utility vehicles

With Growth Strategy focusing on JVs and M&As; Strong financials over the years Promising Future

Launch of Tata Nano, the world cheapest car and the acquisition of Jaguar and Land Rover, the two

iconic British brand have made Tata Motors well known to the people in the world

Core Values: Inclusion, Integrity, Accountability, Customer, Innovation,Concern for environment, Passion for excellence, Agility


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1984 : Indias 1stLCV (407 truck)

2004 :Acquisition of

Tata Daewoo,Korea


stake in

Hispano, Spain

2007 : Formedan industrial JV

with Fiat

2007 : JV inThailand with

Thonburi

2008 : PeoplescarTata

Nano


Jaguar LandRover


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JLRBritish Icons: part of Ford's PremierAutomotive Group (PAG)

Principal Activity - design, development,

manufacture and sale of vehicles bearingthe Jaguar and Land Rover (includingRange Rover) marque

Jaguar - high-end luxury cars

Land Rover - high-end SUVs


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Global footprint and entry into the luxury carsegment

Easy Access to International Markets withEstablished Brands

Technological know-how from Ford on thesebrands

Expansion in TMLs Product Line up Cost effective way of gaining competitive

advantages - technology, brand names,logistical & distribution advantages, eliminationof competitors

Enhancement of financial position in themarket


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Economic slowdown in American and European markets Increased volatility

Jaguar needed funding to be profitable and TML had limitedresources

Cross border acquisition Currency Risk and cultural differences

Timing: both Nano Project &JLR deal needed huge capital increased volatility

Low sales of Luxury cars and competition from BMW, Mercedes etc

TATAs inexperience in managing a loss making and a luxury brandcompany


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Originally, Ford bought Jaguar to enter the luxury carmarket Ford originally paid $2.5 billion for Jaguar, in 1989,

and $3.3 billion for Land Rover, in 1999 Jaguar and LR added up to one of the costliest

chapters in Ford Motor Co.s long history - drainedaway between $35 billion and $50 billion High manufacturing costs in United Kingdom Ford failed to reduce production costs as major

proportion of cost is material cost and they wereunable to buy cheaper materials from suppliers

Continuous decline in the sales of Jaguar from 2005to 2007

Ford had been pumping an average $1 billion to $1.5billion annually into Jaguar, over almost 18 years, withbarely any return


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Fig INR million Tata Motors JLR

Year 2007 2008 2007 2008

Revenue 323,600 356,515 544,698 597,680

GP Margin 9.76% 9.13% 13% 18%

EBIT Margin 9.68% 9.04% -16.3% 4.1%

Net Profit Margin 6.71% 6.06%

Return on Equity 28.24% 25.01%

Operating Cash Flow 221 618 -84 4760


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Corporate Guarantee

Acquisition Debt $3 bn

$600 mn

100% ownership

of JLR

$2.3 bn

SPV 1

(Singapore)

SPV 2 (UK)

JLR Pension

Funds

Equity FundingTML Cash Resources


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Description Contribution made byTML in TML Holdings Pte

Limited (US$ million)through cash/marketablesecurities

Contribution made byTML Holdings Pte

Limited inJaguarLandRoverLimited (US$ million)

Equity Capital 100 50

Preference Capital 400 350

Total 500 400

Description Amount (US$ million)

Capital Contribution 400

Part-Proceeds from the Short Term Bridge Loan 1900Total 2300

Deal was completed on June 2, 2008, for apurchase consideration of US$ 2,300 mn


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A net cash position of US$ 93 million was estimated for Jaguar Land Rover as

at the date of acquisition - This amount represents additional net cash overthe purchase consideration basis from the proceeds of STBL

US$ 700 million from the proceeds from the STBL was utilized byJaguarLandRover Limited for a short term working capital loan to itssubsidiary

Balance Proceeds of STBL - ongoing operational/ contingency requirements

of JLRDetails of Short Term Bridge Loan Initial group of arrangers

The US$ 3,000 million short term bridgeloan facility extended toJaguarLandRover Limited, was pursuantto a credit facility agreement dated

March 13, 2008 with anCiticorp International Limited acted asthe Facility Agent.TML and TML Holdings Pte Limited werealso obligors to the aforementionedcredit facility agreementTML provided a guarantee for thefacility.

The Bank of Tokyo-Mitsubishi UFJLimitedCitigroup Global Markets Asia LimitedING Bank N.V., Singapore Branch

J.P. Morgan Securities (Asia Pacific)LimitedMizuho Corporate Bank LimitedStandard Chartered BankState Bank of IndiaBNP Paribas, Singapore Branch


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After multiple cycles of M&A cases since early 1900s, the investment banking industry hasestablished general characteristics to find the ideal candidate for an LBO

ApproachCharacteristic Makes JLR a

good LBO

candidate?

Comments

Undervalued or out-

of-favor

Yes Ford facing financial issues and stranded

growth with JLR

Mature and steady

(non-cyclical)

business cycle

No Luxury cars top-line growth based on

income levels and hence external factors

Strong, predictable

operating cash flows

No Varying costs for Jaguar and Land Rover

resulting in inconsistent operating cash

flows

Well-established

business and

products

Yes Well established brands of both Jaguar

and land Rover

Moderate CapEx and

productdevelopment (R&D)

requirements

No High capex and R&D costs

Limited working

capital requirements

No $0.7 Bn included in the deal for working

capital financing

Strong tangible asset

coverage

Yes Multiple operational plants and

development centres owned by JLR

Sellers readiness to

cash out or divest

Yes Ford was ready to divest its stake or sell

assets under stressViable exit strategy No After the LBO, TMs options to exit were

ver limited

Typical strategic issues,

- type of the industry,

- competitive landscape,

- major industry drivers and

- potential outside factors like politics

and changing regulations.

most of these did not prove

unfavourable except the factor of global

financial crisis

affected two factors viz. accessibility and

costs of banks and returns on equity

UK was a mature luxury automobile

market with oligopoly market structures

TMs favourable firm specific factors

- management ability

- cash availability

- growth opportunities

- margin improvements


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The gross debt to equity ratio of Tata motors was 1.10 when the LBOpushed this key ratio to 3.03, which amounts to an approximateincrease of 91% in the leveraged beta and corresponding increasein the cost of capital for the firm

This leverage was further pushed to near 4, after the post acquisitionfinancial issues started to become troublesome

In the following 2 years, TML was able to cut operational costs inorder to to increase the firms cash flow

this coupled with the improving macroeconomic performance andgradual payment of the massive LBO debt with the profitabilityturnaround of Jaguar, resulted in decreasing the cost of capital


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Increasing financing costs and debt overload to TM would have lead to bankruptcy havebeen a stand-alone company

- Plan of rights issues failed due to the onset of global financial crisis and was exacerbated bythe generally sceptical view of capital markets towards JLR acquisition.- Many partial attempts to raise the needed loans and threw the company into significantfinancial distress.

- Had to accept expensive refinancing options, and was left vulnerable due to high debt-equity ratio.- Affected TM much more by dramatically decreasing JLRs sales as it was fully exposed toEuropean and US markets. - Refinancing of the bridge loan became much morecomplicated and costly in a situation of dried up global capital markets and line of credits.

Due to lack of funds, TM forced to roll over a part of the bridge loanAfter having repaid around US$ 1 billion.

The higher floating interest rate based on LIBOR was expected to add to the company'sinterest burden.

Rights issues of common equity shares up to $550mn

A equity shares with differential voting rights up to $500mn

5 year, 0.5% cumulative convertible preference shares CCPs up to $750mn

Optionally, they were convertible into A equity shares, but only between 3-5 years from

the date of allotment

About $500-600mn to be raised from issue of securities in foreign markets

Key Issues

Go Forward Approach

$2.3-2.4bn through multiple issues of equity and equity linked instruments


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Most of these issues remained

intact or unchanged as TataMotors had decided to notintensely micro-manage thesubsidiary post acquisition.

Tata Group on other hand,considering the global brand-

building plans to move up inthe value chain as much aspossible.

This created a uniqueconflicting situation which arenot contained by previousinstances of multinational

entries of businesses.

These issues were seen tohave strategic impact onsequent business activities

Hence, Tata group decided

not to micro-manage JLRoperations at least initially.

Need for Control What actually happened? Management Policies

There wasnt any attempt to impose Indian

managers on JLR and almost all key seniormanagers retained their positions.

TM didnt leave the current management on itsown and managed to motivate them throughconstant challenges

Managers couldnt afford to be idle becausethey had been given planned goals &targets.

TM managed to inspire trust and loyalty in JLRemployees.

Clear statements of loyalty from JLR executivescontributed positively in cementing the

relationship.

Feedback from subordinates was given dueimportance.

TATA groups top officials often made trips totheir newly acquired factories and dealerships

outside India and collected feedback fromlocal employees.

A multinational like

Tata Group to knowwhat woulddetermine

- level of control- degree of risks- commitments in the

markets

Other variables whichaffect themanagementframework,- issues of extent ofcultural differences

- economies of scale- country risks- competition


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Geographical and Product Diversification - Access to theglobal automobile market

Jaguar managed to obtain investments to regain its ancientsplendour

With Jaguars technology & design facilities & 3 UK plants,Tata benefitted by launching products at lower costs

New distribution networks

Tata gained access to 26 sales companies along with their IPrights

Tata acquired $1.1 billion in capital allowances for taxes


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Engineeringdesign,manufacturingsolutions and

sourcing services

Supplier programs,consulting servicesand globalSourcing

Q1 supplier

status to supplysteel for Jaguar &Land Rover

Manufacturing,

engineering andsupply chainmanagementavenues

Tata Auto

Components

Tata Steel-

Corus

TataConsultancyServices

INCAT


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Growth Markets

New Product launches

Volumes

Product Mix

Material Cost Reduction

Greater reliability/Lower warrantyMargins

Employee Mobility

Global Sourcing and Assembly

Supplier Management

FlexibilityEngineering efficiencies

Manufacturing efficiencies

Marketing efficiencies

IT transformation

FixedCosts

StreamlinedOperations


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C l i


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Conclusion Tata was assisted in improving the quality of its current products in theIndian market by capitalizing on the design capability and experienceof JLR.

The design and aesthetics of the new models stayed in the UK, which is

the hallmark of the iconic luxury brands, but such designs were alsoprovided to other companies of Tata, especially those based in India.

By acquiring JLR Tata managed to soften competition in the segment itwanted to enter.

Apart from sharing designs, knowledge and skills as well as reducingcompetition in the market, the acquisition of JLR also reduced the costof production thanks to the synergies with other Tata Companies suchas Corus.

Apart from these advantages, Tata also managed to lower itsoperations costs considerably. For example it acquired numerous newtechnologies saving a lot of money in R&D expenses. Furthermore, thecosts of manpower were also reduced, by outsourcing it from India toBritain and vice versa. For instance, off shoring engineering services to

India was one ways money was saved.


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TATA JLR DEAL.pptx

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