Jaguar will be a drag on the deal: Analyst

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Jaguar will be a drag on the deal: Analyst

Ford is considering the sale of two of its European marquees or brands - Landrover and Jaguar. So, what are Land Rover and Jaguar's worth and what's in it for a buyer and what could the potential acquisition strategies be?

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Ford is considering the sale of two of its European marquees or brands - Landrover and Jaguar. One's a sturdy SUV business, the other sells cars dreams are made off. Both are reputed brands and though Land Rover is not doing so badly - Jaguar is struggling financially. Nonetheless the two brands that are being sold together have attracted lots of interest from private equity players such as Cerberus, Blackstone and Apollo to Indian auto companies like Tata Motors and M&M.

So, what are Land Rover and Jaguar's worth and what's in it for a buyer and what could the potential acquisition strategies be? Joining us to examine the various possible twists and turns this deal may take are auto analysts with Global Insight, Phil Lebeau and Rebecca Lindland, Partner at Frost and Sullivan, Sarvant Singh, Editor of Autocar India, Hormazd Sorabjee and CNBC-TV18 correspondents Sumantra Barooah and Raji Rajeshwari.

Excerpts from an interview given to CNBC-TV18

Q: Good numbers coming in from Ford after seven straight quarters of loss, a quarter that has done pretty well, will this make Ford more aggressive on the negotiating table now when it comes to Land Rover and Jaguar?

Phil Lebeau: I do not think they will be more aggressive, I think they have already made a decision, in fact, there was a conference call just few minutes ago, CEO, Alan Mulally said, "We have pretty much decided that we are going to sell Land Rover and Jaguar", so that train has left the station. The question now is, at what price and who is the ultimate buyer of those two brands, so, I do not know if they will be more aggressive. They definitely plan on selling those two brands.

Q: We understand that the condition maybe that both the brands will be sold together and there is likely conditions about plant shutdowns and employee layoffs as well. Did you hear anything from Allan Mulalay on that?

Lebeau: He is not commenting on any of the conditions that might go along with the sale but I have talked with private equity investors in New York city, who are looking at potentially buying these two brands and they all have said the same thing that, when a deal gets structured with Ford, Ford is going to require that Jaguar and Land Rover go as a package deal together. Keep in mind there is so much excess capacity, particularly on the Jaguar side that part of what they will have to work out is the capacity shutdown in England. That is going to be a sticky situation to work out but that is all going to be a part of the deal, when this ultimately takes place.

Q: How would you assess the value of these two brands in terms of the production facilities they have, the technology they have and ultimately what the value of this deal could possibly be?
   
Lebeau: I have heard estimates all over the place from a couple of billion to USD four billion, especially if you look at Volvo which many believe could go for about USD 5 billion but that is a varying estimate and I have talked to some people on Wall Street who said, "I even think USD 3 billion is a little rich for these two automakers together." One other thing you have to keep in mind is that Land Rover - while it is essentially breakeven and slightly positive; Jaguar is a money losing operation. It is not running up to capacity and on the cost side, it is going to be a real drag for whoever buys this combination of Land Rover and Jaguar.

But the fact is that, Jaguar has incredible brand name recognition - something that someone could leverage and if it is run properly, it is a real diamond in the rough. The key possibly is, if we have to strip out a lot of the excess capacity, you have got to shine this automobile operation up considerably. There is a lot of potential there - the key is whether you can extract that potential over the next couple of years.

Q: From your assessment, what do you think the value in this acquisition could likely be?

Hormazd Sorabjee: It is really hard to say - a lot of numbers have been thrown up but clearly I would not be able to put a value to it. But it is not just the value which is the point over here, it is a company like Jaguar because that is going to take billions to fix. It's a 300 million pound loss, which is around 4500 pounds loss per car, so it is really going to need an automotive sugar daddy to give it components which are cheap. It can really wind down development cost specially since the volumes are so low. So, my issue is beyond the purchase prices, what is it going to cost to fix the company?

Q: Where do you think the value in this deal is going to lie for the buyer?

Rebecca Lindland: Both of them are iconic brands, Land Rover even more so. The problem with Jaguar right now is that there is so little direction in terms of are they going to go very much away from the iconic type of Jaguar or they are going to try and go retro and and do something really fabulous. So, there is a lot of direction that needs to be given to Jaguar whereas a Landrover really is very solid right now, they have really nice products.

Q: What are challenges facing a buyer in trying to buy both these brands and turn them around?

Lebeau: A bigger challenge that might happen for M&M or for Tata, is the technology component. More and more on the luxury end of the market, you have got to bring more technology into these vehicles and that costs money. For a company like Ford or a General Motors, they soak up that cost and that is the advantage. When you have these luxury lines, then you can say, 'if it is going to cost a little extra for the latest technology in this vehicle, we can put it in and offset it with  economies of scale'. If you are a smaller automaker or if you are a private equity, then it is going to cost you more and it is going to cut into your profit margins.

So, Tata and M&M, they are big enough that they can soak up that technology cost but that is one of the main challenges because in this stage, if you are building a luxury automobile, you have got to come in with the latest technology and we are not just talking of bells and whistles that people see when they are driving the car, we are talking about the bells and whistles under the hood that is really where the value is expected, in these high-end automobiles.