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.

COMPANY PROFILE 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. SubsidiariesJAGUAR CARS LAND ROVER TATA DAEWOO COMMERCIAL

JAGUAR: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 billion

LAND ROVER: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,

12/06/2007- 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 complete

Reports said losses at Jaguar stood at USD 715 million in 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. The strong boy Land Rover's profit, on the other hand, was driven by the record sale of 2.26 lakh vehicles, an 18% YoY 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

Long term strategic commitment to automotive sector. Opportunity to participate in two fast growing auto segments. Increased business diversity across markets and products. Land rover provides a natural fit for TML’s SUV segment. Jaguar offers a range of “performance/luxury” vehicles to broaden the brand portfolio. Benefits from component sourcing, design services and low cost engineering

100% stake in Jaguar & land Rover Business

TAMO has acquired the business & initially they will be operated independently of the partner. These are well invested plants 4-5000 engineers engaged in testing ,prototype design & powertrain Engineering , development & integration Both existing national sales companies of jaguar/land rover & also those that are carved out of current Ford operation This covers all key technologies to be transferred to JLR & perpetual royalty free license on technologies shared with Ford A minimum guaranteed amount of $1.1 bn which will help managing in Tax going forward

3 Plants in UK 2 advanced design & engineering 26 National sales center company Intellectual property rights Capital Allowance

Support from Ford Motor Credit will continue to support the sales of JLR Ford Motor Credit for around next 12 months Pension Contributed by Ford will contribute $ 600 mn of the Pension Fund

LAND ROVER In £ Material cost /car Employee cost/car £/$ % of sales Material cost Employees 84.5% 9.6% 85.4% 8.9% 2005 20,254 2,565 1.82 2006 21,243 2,444 1.84

JAGUAR 2005 16,299 4,316 1.82 2006 16,928 4,706 1.84

JAGUAR+LAND ROVER 2005 18,919 3,156 1.82 2006 19,976 3,108 1.84

112.8% 24.3%

91.7% 13.4%

91.7% 13.4%

90.3% 12.4%

Investors concerns on manpower costs misplaced 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

(Nos) Jaguar Western Europe America Rest of Word Land Rover Western Europe America Rest of world Total Western Europe America Rest of word

2005 86,651 46,789 32,131 7,731 170,156 97,303 51,634 21,219 256,807 144,092 83,765 28,950

2006 72,680 41,367 22,136 9,177 174,940 95,399 53,638 25,903 247,620 136,766 75,774 35,080

2007 57,578 33,024 16,836 7,718 202,609 109,785 57,092 35,732 260,187 142,809 73,928 43,450 55% 28% 17% 54% 28% 18% 57% 29% 13%

Revenue synergies limited in the medium term (2-3 years) 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)

Total acquisition cost at $3bn assumed to be debtfunded on TAMO’s books 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

Financial Stability ratios

CY2007/FY08E TAMO ($m) 2,664 (271) Consolida ted ($mn) 5,664 2,729

Net Debt Net Debt - excluding vehicle finance biz

This debt includes $3bn raised for acquisition is TAMO auto biz currently minimally leveraged -if we net off the vehicle financing receivables against its Net Debt. On a consolidated basis, the TAMO’s leverage looks adverse – however coverage ratios are still reasonable

Net Debt/Equity Net Debt/EBITDA EBITDA/Interest

1.15 2.23 8.56

2.45 2.66 5.24

TAMO + JLR: Leverage and Valuation ratios
Proforma Valuations (TAMO +JLR) Share price O/S shares Mkt cap ($m) Net Debt ($m) EV ($m) EV ($m) EV/EBITDA (1-yr forward) P/E (1-yr forward) 630 385 6,070 5,664 11,735 0.48 5.5 6.65 The current valuations are inline or discount to global peers This debt includes $3bn raised for acqusisition

Proforma P&L ($ m) $m

TA MO 10,2 10 JLR S P V Cons o 24,4 24

TAMO JLR S P V Cons o 26,21 5

Sales Cost synergies EBITDA EBITDA margin Depreciatio n Interest

14,2 14


14,2 14 71.1

1,19 6 11 .7% 140

935 6 .6% 699

2,13 1 8.7% 917

1,494 12.4% 259

1,00 6 7.1% 699

2,500 9.5% 958

We have assumed a 50bps improvement in JLR’s operating margins in CY2009
We have assumed the entire bridge loan to be converted to long-term debt of $3bn as a stress case scenario and taken the appropriate







Other income





Proforma P&L ($ m)Tax Profit Pre
Interest cost of acquisition Proforma Pretax Profit Impact on TAMO FY09E PB

944 194 225 944 194 (225 ) 1,13 8 225 913

1,19 8 265 225 1,19 8 3% 265 (225 ) 225 1,239 FORD has indicated that JLR is profitable at PBT level We have assumed the entire bridge loan to be converted to long-term debt of $3bn as a stress case scenario and The impact of TAMO’s taken proforma PBT could be the appropriate interest between 5-10% cost


($ m) Net Tangible assets Net Intangible Assets Vehicle Financing receivables

TAMO ($ m) 2,510 111 2,935

JLR ($ m) 2,246 2,010

conso 4,756 2,121 2,935

Net Current Assets




We have assumed TAMO will put $700m as operating cash in JLR on consolidation in JLR. Hence the NCA of TAMO & JLR do not add up The cash equivalents includes shares of Tata Steel worth $400m held at cost of $50m

Cash & eqv Trade Investments Pension Assets Other Assets

638 233 696 3 297

638 233 696 300

Total Assets



12,21 5

($ m) Warranty Liabilities & Other provisions Pension Liabilities Def Tax Liability Shareholders' equity Capital Asset Minority Interest Debt Total Liabilities 30

TAMO ($ m) 489

JLR ($ m) 2,667 19

conso 3,156 19 238

238 2,314 2,456

2,314 156 30 6,302

Since the acquisition cost ($2.3bn) is less than Net asset value of JLR, there is capital asset instead of goodwill

3,302 6,373 5,142


We have assumed $3bn acquisition debt of which $2.3b is used for paying Ford and the balance as operating cash in JLR

Proforma Cashflow ($ m) Cash Profit Chg in operating Working Capital Cashflow from operating activities Increase in Vehicle loan receivables Capex Trade investments Chg in associates Cashflow from Investing activities

T AMO 949 238

JLR 893 (256 ) 637

SPV (225)

Conso 1,617 (18) TAMO has a robust working capital management in its auto biz. Inventory and receivable days at around 30 & 9 respectively and creditors at around 40 days The vehicle loan receivables skew the reported working capital picture as they are shown as part of working capital under Indian GAAP We estimate operating cashflow from auto biz largely covers TAMO’s auto capex . Currently it would be free cashflow neutral to modest +ve.

1,18 7 (776)




(813) (38) 16 (834)

(635 )

(1,447) (38) 16

(635 )


Proforma Cashflow ($ m) Chg in minorities Chg in debt













Cashflow from financing activities Chg in cash








Operating Cashflow Capex





We estimate that JLR has a +ve pretax cashflow

Sale of Tata Steel Shares 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 endFY08E Any sale of vehicle finance biz will significantly de-lever TAMO’s balance

Sign up to vote on this title
UsefulNot useful