LEVERAGE BUYOUT A CASE OF Tata -jlr.
The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.LEVERAGE BUYOUT - definition
TATA MOTORS:- Tata Motors Limited, formerly known as TELCO (TATA Engineering and Locomotive Company), is a multinational corporation headquartered in Mumbai, India. It is India's largest passenger automobile and commercial vehicle manufacturing company. Part of the Tata Group, and one of the world's largest manufacturers of commercial vehicles. Tata Motors was established in 1945, when the company began manufacturing locomotives. The company manufactured its first commercial vehicle in 1954 in a collaboration with Daimler-Benz AG, which ended in 1969.
It is the 5th largest medium and heavy commercial vehicle manufacturer in the world. listed in BSE, NSE & NYSE.
JAGUAR:- manufacturer in the world. listed in BSE, NSE & NYSE.
A statement of ultra luxury, Holds Royal warrants, Rarely advertised, Ford’s formula one entry since 1990s .Founded in 1922 by Sir William Lyons, headquartered at Coventry ,ENGLAND. it became a part of FORD MOTORS in1990 when Ford acquired Jaguar for $2.5 billionTATA MOTORs– jlr deal
LAND ROVER:- manufacturer in the world. listed in BSE, NSE & NYSE.
Founded in 1948 as a marque of the Rover Company. Land Rover is an all-terrain vehicle and Multi Purpose Vehicle(MPV) manufacturer, based in Solihull, West Midlands. In 1994 Rover Group is taken over by BMW & sold to FORD MOTORS for 2.75 bn$ in 2000. It is Known for superior off-road performance, Used by military for projects and expeditions,TATA MOTORs– jlr deal
12/06/2007 manufacturer in the world. listed in BSE, NSE & NYSE.- Announcement from Ford that it plans to sell Land Rover and Jaguar.
August 2007 - Major bidders are identified
Likely buyers: Tata Motors, M&M, Ceribrus capital Management, TPG Capital, Apollo Management
India’s Tata Motors and M&M arrive as top bidders ($ 2.05b & $ 1.9b)
03/01/2008 – Ford announces Tatas as the preferred bidders
26/03/2008 - Ford agreed to sell their Jaguar Land Rover operations to Tata Motors.
02/06/2008 – The acquisition is completeTATA MOTORs– jlr deal process
Investors concerns on manpower costs misplaced 2006. Jaguar has been a dog i.e. it has not been able to provide any profit for ford because of the high manufacturing costs provided in the United Kingdom.
It is more important to manage the material & sourcing costs to improve margins
Material Cost is 4-6x the wage cost for high-end products such as Land Rover
Cost synergies – Tata Group has multiple levers
TATA group has a rich ecosystem of JVs with leading players in Auto ancillary space
TCS, Corus and Tata Technologies have varied competencies in the Auto spaceCost synergies
Revenue synergies limited in the medium term (2-3 years) 2006. Jaguar has been a dog i.e. it has not been able to provide any profit for ford because of the high manufacturing costs provided in the United Kingdom.
In the long-run Tata Group and Tata Motors’ footprint in South-East Asia should help
Jaguar/Land Rover diversify their geographic dependence from US (30% of volumes) and
Western Europe (55% of volumes)Revenue synergies
We have not considered any asset sales in our calculations
Financial Impact: Leverage increases but coverage ratios reasonable
Headline Debt/Equity of TAMO would increase to 2.5x from 1x
Excluding the vehicle finance biz, leverage would go to 1.2x
EBITDA/Interest remains at 5.0
Valuation: TAMO is trading inline/modest discount to global peers
EV/Sales (1-yr forward) of 0.5x against 0.4x for global peers
P/E (1-yr forward) of 6.5x against 8.5x for global peersFinancial Impact & Valuation of acquisition
Sale of Tata Steel Shares TAMO’s books
TAMO holds $400m worth of Tata Steel shares (4.3% of outstanding shares)
Tata group holds 33.7% in Tata Steel leaving room for some reduction in group stake
Stake sale / IPO of Telcon, HV Axles, HV Transmissions
We value Telcon at around $1bn (13xFY09E EPS); TAMO holds 60% stake in it
HV Axles and HV Transmissions are 100% owned by TAMO (est value $200-250m)
Sale of Vehicle Finance business (Tata Motor Financial Services Ltd)
Since 3QFY07, TAMO’s incremental vehicle finance biz is housed in this subsidiary
We estimate total loan receivables (TMFSL + TAMO) at Rs 120bn by end-FY08E
Any sale of vehicle finance biz will significantly de-lever TAMO’s balance sheet
Tata group has recently floated a new company called Tata Capital with a mandate
which includes Vehicle Financing
We also do not rule out an LBO structure to finance the purchase
We estimate JLR EBITDA at around $1bn against capex of $600-700m
This leaves excess cashflow to service at least $1bn of debtFunding: We highlight a few possibilities for TAMO