Will Ford give away Jaguar?
Ford has decided to accept bids which are not supported by financing for its Jaguar/Land Rover unit. Ford boss Alan Mulally is putting on a happy face, but indications are that the sale of the Jaguar/Land Rover unit of Ford is in deep trouble, much more trouble than Ford has publicly acknowledged.
Earlier, we reported that Mulally had said that tightening credit markets were having an effect on efforts to sell the unit, but claimed the proposed sale was still on track. Last week, Ford’s European chairman, Lewis Booth, predicated the sale would occur before the end of this year.
However, according to the British newspaper “Telegraph,” the situation is worse than Ford is admitting. One Ford insider is quoted in the newspaper as saying that “The financing market for these sorts of deals is shut. There is nothing you can do. The markets just aren’t open."
As a consequence, according to the Telegraph, Ford is no longer requiring that potential buyers in the second round of bidding have financing in place to support their bids.
The Telegraph reports that Ford wants about $3 billion for Jaguar/Land Rover.
It is looking very much like Ford won’t get that much.
On Friday, the chairman of Indian car company Tata said Tata Group is interested acquiring Jaguar and Land Rover. As an Indian company, Tata would probably have access to funds outside of the private equity market. But to get top dollar, Ford needs a multitude of bidders. Among those who appear to be bidding are former Ford presidents Nick Scheele and Jac Nasser, each with the backing of a private equity group. Ford’s decision to allow bids which are not backed by financing seems designed to keep these groups in the bidding, perhaps in the hope that doing so will keep the price up.
If that’s the thinking, it doesn’t seem likely to work. The contraction of the equity market triggered by concerns over the liquidity of sub-prime mortgage lenders appears to be long lasting. Indeed, automakers are pointing to that problem as a reason for declining sales. If bidders haven’t been able to figure out where they’re getting the money by now, there is no reason to believe they’re going to get it later.
That means that a company like Tata – one which can get financing internally or through its own pool of investors – may be Ford’s only realistic buyer unless Ford is prepared to finance the deal itself. In those circumstances, there is no reason to believe a buyer with money would offer anything close to what Ford’s asking price.
Ford is between a rock and a hard place.
Ford has to dump Jaguar and Land Rover. The unit lost over $12 billion last year. Though some analysts believe Ford has built the infrastructure at Jaguar needed for the unit to become profitable, Ford simply hasn’t the time needed to see it through. Ford needs the money. It’s not so much what they’d get from selling Jaguar/Land Rover. It’s what Ford would keep by not having to cover the unit’s losses.
Other than selling to a company, such as Tata, that has money, Ford’s only other option is to sell to a private equity group that doesn’t have money, with the hope that a year or two from now the equity markets will have opened up and the buyer will be able to refinance. Functionally, Ford would become a passive investor in Jaguar and Land Rover. It wouldn’t get any money until and unless Jaguar/Land Rover made a profit or the buyer refinanced, but it would at least be able to get the unit’s perennial losses off its books.
Even that option may be a mirage. Anybody taking over Jaguar/Land Rover is going to have to come up with money to cover the current losses. Ford might be willing to finance the purchase price, but having to finance ongoing losses defeats the purpose of selling the unit.
In the end, Ford may end up having to give away Jaguar and Land Rover.
Put yourself in the position of a buyer such as Tata, a buyer with money:
You know that Ford needs money to finance a possible health care buy out with the UAW and to finance new products. You know that Ford cannot afford the losses of the Jaguar/Land Rover unit. You also know that most of the other potential buyers have no money and can’t get any.
Ford’s latest move is designed to maintain the appearance that Jaguar/Land Rover has value. But, the reality is otherwise. Ford will be lucky to find a buyer at any price and it will sell at whatever price it can get.