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Case Study Tata - JLR Deal (Jaguar Land Rover Acquisition by Tata Motors) Disclaimer Names and numbers have been changed / garbed wherever necessary to keep the real identities of the corporate and brand confidential.

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Page 1: Jaguar Land Rover Acquisition by Tata MotorsJaguar land rover acquisition by tata motors

Case Study Tata - JLR Deal

(Jaguar Land Rover Acquisition by Tata Motors)

Disclaimer Names and numbers have been changed / garbed wherever necessary to keep the real identities of the corporate and brand confidential.

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INDEX

Topic Page No.

Introduction 1

Tata – Ford (JLR deal) 2

Why did TATA go for JLR? 3

Is deal really worth it? 5

Disadvantages by not going for this acquisition? 8

SWOT Analysis 9

Assignment Questions 11

Explain the problem faced by Ford Motors with its luxury brand JLR?

13

What kind of strategic advantage Tata Motors will get with the acquisition of JLR?

15

How Tata Motors decided to finance the acquisition of JLR?

18

What went wrong in financing the deal? Explain in detail.

20

Explain in brief the different instrument used in financing the deal?

24

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INTRODUCTION

In June 2008, India-based Tata Motors Ltd. announced that it had completed the acquisition of the two iconic British brands - Jaguar and Land Rover (JLR) from the US-based Ford Motors for US$ 2.3 billion. Forming a part of the purchase consideration were JLR's manufacturing plants, two advanced design centers in the UK, national sales companies spanning across the world, and also licenses of all necessary intellectual property rights. There was a widespread skepticism in market over an Indian company owning the luxury brands. According to industry analysts, some of the issues that could trouble Tata Motors were economic slowdown in European and American markets, funding risks, currency risks etc. Market conditions were extremely tough, especially in the key US market. Tata’s needed to invest a lot in brand building to make JLR profitable. Onset of recession not only made investment look mistimed, but also started wiping out the JLR market.

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TATA – Ford (JLR deal)

Ford Motors Company (Ford) is a leading automaker and the third largest multinational corporation in the automobile industry. The company acquired Jaguar from British Leyland Limited in 1989 for US$ 2.5 billion. After Ford acquired Jaguar, adverse economic conditions worldwide in the 1990s led to tough market conditions and a decrease in the demand for luxury cars. The sales of Jaguar in many markets declined, but in some markets like Japan, Germany, and Italy, it still recorded high sales. In March 1999, Ford established the PAG with Aston Martin, Jaguar, and Lincoln. During the year, Volvo was acquired for US$ 6.45 billion, and it also became a part of the PAG. In September 2006, Allan Mulally (Mulally), President and CEO of Ford, as part of the restructuring exercise called the ‘Way Forward' plan decided to dismantle the PAG. In March 2007, Ford sold the Aston Martin sports car unit for US$ 931 million. In June 2007, Ford announced that it was considering selling JLR. After failing to re-brand and integrate these luxury brands with its product portfolio, Ford Motors felt that acquisition was not the right way of penetrating into the upscale segment. Tata Motors was interested in acquiring JLR as it will reduce the company’s dependence on the Indian market alone, which accounted for 90% of its sales. Morgan Stanley reported that JLR’s acquisition appeared negative for Tata Motors, as it had increased the earnings volatility, given the difficult economic conditions in the key markets of JLR operated - US and Europe. Tata Motors raised $3 billion (about Rs 12,000 crore) through bridge loans for 15 months from a consortium of bank, Citigroup, State Bank of India and financial institution- JP Morgan. Tata Group came under severe cash crunch because of the Corus deal and the huge investments in the TATA Nano project which itself was surrounded in a lot of uncertainties. The credit rating companies also took a negative outlook toward this deal because of the huge debt requirement to complete the deal.

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Why did TATA go for JLR?

Tata Motors had several major international acquisitions to its credit. It had acquired Tetley, International luxury hotels, South Korea-based Daewoo's commercial vehicle unit, and Anglo-Dutch Steel maker Corus (Refer to Exhibit I for the details of the group's international acquisitions). Tata Motors' long-term strategy included consolidating its position in the domestic Indian market and expanding its international footprint by leveraging on in-house capabilities and products and also through acquisitions and strategic collaborations. On acquiring JLR, Ratan Tata, Chairman, Tata Group, said, "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 will endeavor 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." Tata Motors stood to gain on several fronts from the deal.

1) The acquisition would help the company acquire a global footprint and enter the high-end premier segment of the global automobile market. After the acquisition, Tata Motors would own the world's cheapest car - the US$ 2,500 Nano, and luxury marquees like the Jaguar and Land Rover.

2) Tata also got two advance design studios and technology as part of the deal. This would provide Tata Motors access to latest technology which would also allow Tata to improve their core products in India, for eg, Indica and Safari suffered from internal noise and vibration problems.

3) This deal provided Tata an instant recognition and credibility across globe which would have otherwise have taken years.

4) The cost competitive advantage was as Corus was the main supplier of automotive high grade steel to JLR and other automobile industry in US and Europe. This would have provided a synergy for TATA Group on a whole. The whole cost synergy that can be created can be seen in the following diagram.

5) In the long run TATA Motors will surely diversify its present dependence on Indian markets (which contributed to 90% of TATA’s revenue). Along with it due to TATA’s footprints in South East Asia will help JLR do diversify its geographic dependence from US (30% of volumes) and Western Europe (55% of volumes).

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Analysts were of the view that the acquisition of JLR, which had a global presence and a repertoire of well established brands, would help Tata Motors become one of the major players in the global automobile industry.

•Provides services like supplier programs, consulting services and global outsourcing.

•Customers include Chrysler, Ford, GM etc.

•Provides engineering design, manufacturing solutions and sourcing services.

•Major customer include Chrysler, Ford , GM etc.

•Leader in the automative grade steel.

•16% of revenue fron auto steel division.

•TAMO's flagship ancillary biz.

•Customers inc. Ford, Daimler, FIAT etc.

TACO TATA Corus

INCAT TCS

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Is deal really worth it?

Morgan Stanley reported that JLR’s acquisition appeared negative for Tata Motors, as it had increased the earnings volatility, given the difficult economic conditions in the key markets of JLR including the US and Europe. Moreover, Tata Motors had to incur a huge capital expenditure as it planned to invest another US$ 1 billion in JLR. This was in addition to the US$ 2.3 billion it had spent on the acquisition. Tata Motors had also incurred huge capital expenditure on the development and launch of the small car Nano and on a joint venture with Fiat to manufacture some of the company’s vehicles in India and Thailand. This, coupled with the downturn in the global automobile industry, was expected to impact the profitability of the company in the near future. Worldwide car sales are down 5% as compared to the previous year. The automobile industry the world over is rationalizing production facilities, reducing costs wherever possible, consolidating brands and dropping model lines and deferring R&D projects to conserve funds. The Chinese and Indian domestic markets for cars have been exceptions. While China has witnessed a significant reduction in its automotive-related exports and supplies to automobile companies, the Chinese domestic car market has grown by 7%. In India the passenger car market has remained more or less flat compared to the previous year. Since then, its fortunes have been unsure, as the slump in demand for automobiles has depressed its revenues at the same time Tata has invested nearly $400 million in the Nano launch and struggled to pay off the expensive $3 billion loans it racked up for the Jaguar/Land Rover shopping bill. Within the space of a year, Tata Motors has gone from being a developing-world success story to a cautionary tale of bad timing and overly ambitious expansion plans. Tata Motors' standalone Indian operations' profits declined by 51% in 2008-09 over the previous year. All through the fiscal year ended March 2009 the company bled money, losing a record $517 million on $14.7 billion in revenues, just on its India operations. Jaguar and Land Rover lost an additional $510 million in the 10 months Tata owned it until March 2009. In January 2009, Tata Motors announced that due to lack of funds it may be forced to roll over a part of the US$ 3 billion bridge loan after having repaid around US$ 1

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billion. The financial burden on Tata Motors was expected to increase further with the pension liability of JLR coming up for evaluation in April 2009.

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Disadvantages by not going for this acquisition?

There was immense pressure from the shareholders, analysts’ community etc. to abort the deal as they unanimously agreed that it was over priced and the balance sheet of TATA was not in a position to absorb more loan (as discussed in the previous section). Ford purchased JLR at $5 bn and sold at almost half the price to TAMO after operating it for losses for few years. As the market would have recovered from recession the valuation would have increased since there would have been growth in the demand of JLR thus creating more problems for TAMO. Tata would not have been able enter into the premium segment (>10 lakhs) in India. TAMO would have lacked in robust designing capabilities. Above all, at that time no other major automobile brand was available for acquisition with such designing and R&D capabilities.

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SWOT Analysis

Opportunities: • Rising appetite for luxury

automobiles in growing markets like India and China

• Established European brands available at affordable investment

• Support from Jaguar in Technology, Engine, IT, Accounting

• Complete product line with addition of luxury brands

• Access to European and American Market

Threats • Volatility in market driven by

new products • Strong presence of competitors

like Mercedes, BMW, Lexus and Infinity

• Receding sales and brand image • Downturn making Investment

riskier and costlier • 90% of TAMO revenues comes

from one market alone-India

Strengths: • Tata’s strong

management capability

• Strong monetary base to invest

• Synergy due to Corus, TACO and TCS

• Experience in growing market like India

• New product development and brand building experience

• JLR would give TAMO an in-house R&D and designing capabilities

• Better utilization of cash reserves available with TAMO

• Reduce production cost of JLR by synergizing better with other TATA cos like Corus

• Acquisitions like JLR will help TAMO in competing with brands like Merc. etc.

• Proven Management and brand building capabilities would facilitate faster JLR turnaround

• Strong financial muscle will help TAMO to invest in R&D and produce new better products

• Improve risk profile of TAMO with diversification in different markets

Weaknesses: • Inexperience in

Handling luxury automobile brand

• Inexperience in turning around loss making company

• R & D and designing capabilities

• JLR experience and designing capability would help TAMO in improving their existing products in Indian markets.

• JLR’s strong brand image will ease acceptance of TAMO in international markets

• Keeping the existing management team of JLR make turning around easier

• Leverage experience gained with Tetley and Corus in allaying market apprehensions about acquisition

• Make Jaguar design center as their global design HQ

• Use Jaguar channel to distribute TAMO brands without merging the brands

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Assignment Question for group

Based on the Case Study, answer the following question :

a. Explain the problem faced by Ford Motors with its luxury brand JLR? b. What kind of strategic advantage Tata Motors will get with the acquisition of

JLR? c. How Tata Motors decided to finance the acquisition of JLR? d. What went wrong in financing the deal? Explain in detail. e. Explain in brief the different instrument used in financing the deal?

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Explain the problem faced by Ford Motors with its luxury brand JLR?

In 2006, reports said that losses at Jaguar stood at USD 715 million. Jaguar was not performing well as it was unable to provide any profit for Ford due to high manufacturing costs in United Kingdom. The wellbeing of Land Rover's profit, on the other hand, was boost up by the record sale of 226,000 vehicles, an 18% year over year growth in 2007. "Bringing down production costs and turning around the company successfully will be the challenge,” analysts said. It was a test that Ford failed. Ford is combining both the brands since the products and manufacturing of vehicles for Land Rover and Jaguar is so intertwined. The US auto major put the two marquees on the market in 2007 after posting losses of $12.6billion in 2006 - the heaviest in its 103-year history The table below shows the number of sales of JLR after acquired by Ford:

From the table, we may see that the sales of Jaguar are decreasing dramatically from 2005 until 2007. After intertwined Jaguar and Land Rover, sales from year to year fluctuated without certainty of growth. This is one of the reasons that lead Ford’s decision to sell JLR to Tata Motor.

Numbers 2005 2006 2007

Jaguar 86,651 72,680 57,578

Western Europe 46,789 41,367 33,024 57%

America 32,131 22,136 16,836 29%

Rest of Word 7,731 9,177 7,718 13%

Land Rover 1,70,156 1,74,940 2,02,609

Western Europe 97,303 95,399 1,09,785 54%

America 51,634 53,638 57,092 28%

Rest of world 21,219 25,903 35,732 18%

Total 2,56,807 2,47,620 2,60,187

Western Europe 1,44,092 1,36,766 1,42,809 55%

America 83,765 75,774 73,928 28%

Rest of word 28,950 35,080 43,450 17%

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The table below shows the cost of production for JLR:

From the table, we may observe that Ford failed to reduce production costs as major proportion of cost is material cost and they unable to bought cheaper materials from suppliers. This however is very different if Tata Motor takes the ownership because they are utilizing country’s vast natural resources

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What kind of strategic advantage Tata Motors will get with the acquisition of JLR?

After the acquisition of the British Jaguar Land Rover (JLR) business, Tata Motors had obtained numerous benefits and advantages. Below are the reasons behind Tata Motors’s decision to acquire JLR:

1) Long term strategic commitment to automotive sector which Tata Motors want to become a major player in the international automobile market.

2) Opportunity to participate in two fast growing auto segments to fulfill part of Tata Group’s ongoing strategy of internationalization.

3) Increased business diversity across markets and products. 4) Land Rover provides a natural fit for Tata Motors’s Sport Utility Vehicle (SUV)

segment which attracted Tata Motor. 5) Jaguar offers a range of “performance/luxury” vehicles to broaden the brand

portfolio internationally. 6) Benefits from component sourcing, design services and low cost engineering

by obtaining intellectual property rights related to the technologies. 7) Improved corporation’s image and increased its public reputation.

Subsequent to the acquisition of JLR, Tata Motors benefited:

100% stake in

Jaguar & land

Rover Business

Tata Motors has acquired the business & initially they

will be operated independently of the partner.

Three plants in UK Tata Motors will directly own these two well invested

plants by Ford.

Two advanced

design &

4000-5000 engineers engaged in testing, prototype

design & power train engineering, development &

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engineering center integration.

Twenty six National

sales company

Both existing national sales companies of JLR and

also those that are carved out of current Ford

operation would be owned by Tata Motors.

Intellectual

property rights

These covers all key technologies to be transferred to

JLR & perpetual royalty free license on technologies

shared with Ford.

Capital Allowance Capital allowance with a minimum guaranteed

amount of US $1.1 billion to be carried forward for

future tax savings.

Support from Ford

Motor Credit

Ford Motor Credit will continue to support the sales

of JLR for the next 12 months

Pension

Contributed by Ford

Ford will contribute US$ 600 million of the Pension

Fund to the workers in United Kingdom

After analyzed the case study, we believe that the main reason influence Tata Motor’s decision to acquire JLR is to go global by acquiring famous international brand to increase its global image. By acquiring JLR, Tata Motors able to obtain intellectual property rights related to the technologies from JLR at the meantime improve corporation’s image and increase its public reputation. It is not wrong to possess such ambitious corporate mission and vision with aggressive strategies and strong support from the high working capital. However, there are always some

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questions being asked which form a doubt feeling among public. The questions are sound like -- Have Tata Motors make enough pre-acquisition jobs such as risk measurement and macroeconomic study before acquisition of the British Jaguar Land Rover (JLR) business on a cash free and debt free basis? Are there any problems company could face in financing acquisition? Would Tata Motors face problems after the acquisition of JLR? We would discuss these in the further sections.

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How Tata Motors decided to finance the acquisition of JLR?

In the summer of 2007, before Tata Motors Ltd took over Jaguar Land Rover (JLR), Ratan Tata and Ravi Kant embarked on a trip through the US. Their objective—to gauge whether the legendary British marques still evoked enough passion in the biggest market for the vehicles to justify the acquisition.

• Tata Motors could comfortably finance the acquisition of Jaguar and Land Rover. The Indian automaker was sitting on a cash of over Rs 6,000 crore and generated free cash of over Rs 1,000 crore during FY-2007. It could easily use these reserves to raise more funds without endangering its finances.

• Rs. 1.92 Billion underwriting agreement with J M financial Consultants. • Rs.1.75 Billion was raised through a deposits scheme from the Public. • At the end of last financial year, Tata Motors Debt-to-Equity ratio was a low

0.56, giving it ample room to raise more funds. • Additional subscriptions by promoter companies such as TATA Sons, TATA

Capital and Investment. • Low leverage of the auto business provided funding flexibility • Additional amount of US $0.7 billion was for engine and component supply,

contingencies and working capital. • It intended to refinance the loan through long-term funds valuable stakes in

group companies

Owns $400m of Tata Steel at current prices

Owns stake in Tata Sons (Tata Group’s holding company) worth at least $600m

Cash management “A three-tier model was developed,” said Wolfgang Bernhart, partner, Automotive Competence Center, Roland Berger. First, a short-term goal to manage liquidity with the assistance of KPMG was put in place. Then came a mid-term target to contain costs at various levels and the formation of 10-11 cross-functional teams, Bernhart said. A number of management changes, including new heads at JLR, were made. Finally, a long-term goal that runs until 2014 was drawn up, focusing on new models and refreshing the existing ones. The key aims—cash management and checking costs.

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When Roland Berger added up the money that could be saved, the company was astonished at how high the figure was. A team of young managers was put in charge, in an approach similar to the one followed in the 2003 restructuring at Tata Motors, with reviews on a daily basis. Tata Motors also embarked on a plan to divest stakes in group companies to raise cash: In September 2008, it sold a 1.3% holding in Tata Steel Ltd to holding company Tata Sons Ltd for a total Rs 485 crore. In November 2008, the board approved a Rs 4,147 crore rights offer, which was completed in June this year. All proceeds were channelled into Tata Motors to make JLR profitable. Crucially, Tata Motors was able to keep product development plans going, which has paid off with the global economy reviving and customers returning to JLR showrooms. The programme also saw the workforce being trimmed since July 2008 by around 11,000 from a gargantuan workforce of 27,000 at JLR. According to chief financial officer C. Ramakrishnan, who spoke to analysts after announcement of the September quarter results, the workforce was trimmed by another 1,800 to 16,000. JLR’s turnaround has been aided by external factors. In a 9 November earnings call with analysts, Ramakrishnan said margins had benefited from favourable currency movements, widening by one percentage point to 16.6%, over the first quarter of 2010-11. However, the extent of the turnaround can be gauged when margins are compared with corresponding quarter of previous year. Margins rose by a whopping 1,370 basis points or 13.7% from 2.9% in 30 September 2009-10, reflecting the changed dynamics of the company as sales rose sharply on the back of new product launches and improved market sentiments. About half the firm’s turnover is dollar-linked while one-fifth is linked to the euro. The rupee has strengthened against both currencies this year. Since January, the pound has strengthened 4.9% against the dollar and 7.7% against the euro.

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What went wrong in financing the deal? Explain in detail.

Problem 1: Lack of access to credit to repay the bridge loan of US$3 Billion

Tata Motors was facing problem in cash liquidity and have negative working capital after the acquisition of JLR. Besides, the debt ratio had increased over the five years and they have negative interest coverage which these shows that the company was having problem in paying the bridge loan. Subprime mortgage crisis has caused the demise of Lehman brothers which later lead to the collapse of the global financial sector and further deepened the global financial crisis. Consequently, the global line of credit is frozen which has cut the availability of financing for companies throughout the global economic crisis. Tata Motors was finding it difficult to access credit and raise fund from the stock market due to the tight liquidity conditions, a gloomy and depressed stock market and lack of investors’ confidence. Besides, lacking of working capital has caught them into trouble to repay the bridge loan of US$ 3 billion which used to finance the acquisition of Jaguar and Land Rover (JLR). The bridge loan was due on June 2009 and yet at the end of the year 2008, the company was able to repay only US $ 1 billion. Problem 2: Global financial crisis has severely impacted the global automobile industry especially the luxury cars segment The automobile sector in India was severely impacted by the global financial crisis in the Indian and global business environment. GDP growth slowed down substantially from 9 % in year 2008 to 6.7% in year 2009. Followed by high inflation and high material cost which lead to higher vehicle prices and fuel prices, unavailability of finance or higher cost of finance as well as gloomy economic conditions had slumped the demand badly. (Annual Report 2009) These factors have tremendously pressured both Tata Motors’ commercial and passenger vehicle industry which lead to sales declined. Jaguar and Land Rover faced severe demand contraction due to the negative wealth effect. As the fuel price and interest rate increase plus the

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continuing credit squeeze, consumers would buy low cost and low fuel consumption car rather than luxury and high fuel consumption car like JLR. So, the problem occurs as the JLR could not generate working capital to Tata Motors and the recessionary trends deepened the domestic vehicle sales. The industry performance in the domestic market during FY08-09 and the Company’s share is given below:

Source: Society of Indian Automobile Manufacturers report and Company Analysis * including Magic and Winger sales # including Fiat branded cars The Company’s exports also declined by 38.6% during the year 2009, due to the meltdown in major international markets and the consequent swings in foreign exchange rates. The graph below shows the dropped of sales which affected the net profit margin:

Problem 3: Increasing materials and fuel prices have slow the demand of vehicles Due to the impact of tighter money supply with higher interest rate, there will be meteoric rise in fuel and materials (e.g.: steel, tyres) price. High fuel price has caused Tata Motors to feel the heat of slowing demand. Decrease in sales volume and increase in cost as well as bearing the increment of short term debt would easily kill Tata Motors. Therefore, a probable solutions would keep them survive and grow.

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Both graphs above show the steel and fuel price pattern from the years 2007 and 2000 until 2010. Problem 4: Share price dropped drastically and affect its global image As the debt market was frozen, Tata Motors turn to the equity market to raise fund. After the issuance of ordinary shares with right basis where existing shareholders could get one ordinary shares for every six shares held, the earning per shares of the company dropped. This is due to the company earnings dropped (effects of the global economic crisis) and the number of shares outstanding increase. The dropped of shares price and EPS caused the investors and public losing confidence on Tata and later it had affected its global image. Now, everybody is in doubt whether Tata

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Motors able to survive and increase the EPS in the future and would think twice before investing in Tata Motors.

The share price of Tata Motors dropped drastically after the issues of ordinary shares on the right basis. Problem 5: Relocation of Nano’s factory from West Bengal to Gujerat The factory of producing Tata Nano was set up at West Bengal in order to launch the product on October 2008 but due to the violent political agitation in West Bengal over the land issue, Tata Motors was forced to relocate their prestigious Nano project to Gujarat. This has eventually delayed the launching of Tata Nano in October and increase the cost of setting up factory and facilities to produce Nano.

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Explain in brief the different instrument used in financing the deal?

Behind acquisition of Jaguar Land Rover, Tata Motors had following strategic considerations:

1. Long term strategic commitment to automotive sector. 2. Opportunity to participate in two fast growing auto segments (premium

and small cars) and to build a comprehensive product portfolio with a global footprint immediately.

3. Increased business diversity across markets and product segments. 4. Unique opportunity to move into premium segment with access to world

class iconic brands since: (a) Land Rover provides a natural fit above TML’s Utility

Vehicles/SUV/Crossover offerings for the 4x4 premium category (b) Jaguar offers a range of “Performance/Luxury” vehicles to broaden

the brand portfolio 5. Sharing of best practises between Jaguar, Land Rover and Tata Motors in

the future 6. Long-term benefits from component sourcing, low cost engineering and

design services. Tata motors meticulously planned its refinancing strategy as follows:

• TML raised a 15 month bridge loan of $3bn to finance the acquisition • TML also planned to raise about Rs.92bn ($2,300mn) and • Rs.96bn ($2,400mn) (through issue of equity / equity linked instruments to

refinance bridge loan • 3 simultaneous but unlinked Rights Issues of about Rs.72bn ($1,800mn) of the

following securities (Price range to be determined in due course):

Equity shares upto Rs.22bn ($550mn) – ‘A’ Equity shares carrying differential voting rights upto Rs.20bn ($500mn)

Optionally convertible into ‘A’ Equity Shares after 3 years but before 5 years from the date of allotment (upto $750mn)

Approx USD 500/600mn to be raised through issue of securities in the foreign markets

Above equity issues were estimated to increase the then existing equity capital by about 30%-35% in FY09. In the event of CCP conversions between 2011 and 2013, additional increase of about 12% was also estimated

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The amount was repaid by using different instrument in financing the deal in following manner :-

• Rs.1.92 billion Underwriting agreement with JM financial consultants • Rs.1.75 billion was raised through a deposit scheme from the public • Additional subscriptions by promoter companies- Tata sons, Tata capital and

Tata Investment Ltd. • $ 1 billion aid package by British Government. (out of total $2.3 billion)