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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
2005 :Acquisition of
stake in
Hispano, Spain
2007 : Formedan industrial JV
with Fiat
2007 : JV inThailand with
Thonburi
2008 : PeoplescarTata
Nano
2008 :Acquisition of
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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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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