Global Economics

Ford Still Shopping Mazda Stake; Tata Uninterested


Already absorbing Land Rover and Jaguar, Tata Motors denies that it's looking to buy Ford's one-third stake in the Japanese automaker

In recent times, it seems, every time an auto brand is put up for sale India's Tata Motors (TTM) is mentioned as a possible buyer. In June, it was GM's (GM) unloved Hummer line (BusinessWeek.com, 6/6/08) that was linked with Tata and Indian rival Mahindra & Mahindra (MAHM.BO). On Oct. 11, Tata was named in Japan as a possible buyer (BusinessWeek.com, 10/11/08) of Ford's (F) one-third stake in Mazda (MZDAF), which unconfirmed reports say the U.S. automaker is keen to reduce.

On Oct. 13, Tata made clear it has no intention of acquiring a stake in the Japanese automaker. "Tata Motors clarifies that the report is incorrect," the company noted in a short statement. In June, Tata had issued a similar comment about Hummer. Mazda issued a statement on Oct. 11 stating nothing had been decided. "We have nothing to disclose," the company noted.

On Oct. 13, Ford President Mark Fields said reports that Ford would sell a piece of Mazda were "speculative." Asked to what level Ford's stake could drop and the U.S. automaker could still maintain the benefits it gets from its current controlling interest, Fields said: "The cooperation between the two companies goes beyond the percentage of our stake.…What we do today benefits both companies enormously."

So what explains the linking of Tata's name to a deal to buy a stake in Mazda? To an extent it is understandable. After all, the Tata group of companies has a history of making big deals (BusinessWeek.com, 1/31/07), and in March, Tata Motors paid $2.3 billion to Ford for the Jaguar and Land Rover brands (BusinessWeek.com, 3/26/08).

Challenges Aplenty for Tata Motors

Yet while Ford's stake in Mazda, valued at about $1.4 billion, might seem a better value than the two luxury brands, closer inspection of some of the current challenges facing Tata suggests it's unlikely to be adding any new auto brands to its lineup in a hurry. Tata's management team has plenty on its plate right now.

Like all automakers, Tata is adjusting to the impact of the credit crunch. In India that means slower-than-expected auto sales. Analysts say auto sales growth in India will slump to 8% this year, from 15% last year. In September, Tata's car sales slipped 2.5% compared with a year earlier. That drop, combined with rising costs, is hurting profitability. While Tata's profit margins were a healthy 8% in the quarter that ended June 30, earnings fell 30%, to $77 million.

Then there's the funding of the Land Rover and Jaguar deal. To pay for acquisition, Tata took out a bridge loan underwritten by a group of global banks, including Japan's Mitsubishi UFJ (MTU) and Mizuho Financial Group (MFG). But with the global liquidity crisis squeezing credit in India, rather than take new loans Tata is opting to refinance the loans through a combination of asset sales and new equity. On Sept. 29, the company aimed to raise $855 million through two rights issues, one priced at $7 a share and another, with fewer voting rights, at $6.30. Since then Tata Motors' stock, already down 53% in 2008, has dropped a further 16%, to $6 a share. "It is going to be tough for investors to subscribe [to the current terms]," say Ramnath Subramaniam, director of research at Mumbai-based IDFC-SSKI Securities.

Likely Japanese Buyer for Mazda Stake

If all that wasn't enough to deter the company from making another eye-catching deal, there are also the well-documented problems with the Nano, Tata's $2,500 car, which is slated for a fourth-quarter launch. Tata has endured prolonged protests at the site of its Nano factory in Singur, East Bengal (BusinessWeek.com, 8/29/08). Now it's relocating the plant to Sanand, Gujarat, at a cost of $62 million. Analysts say it will miss an earlier target to sell 40,000 Nanos by March 2009.

So what will become of Mazda? Reports in Japan say that if Ford's sale of some or all of its stake in Mazda goes ahead, Japanese trading companies Sumitomo (8053.T) and Itochu (8001.T), both of which work with Mazda on overseas sales, are likely buyers. According to an Oct. 12 report in Japan's Nihon Keizai Shimbun newspaper, Ford has approached 20 to 30 Japanese companies and financial institutions about buying its shares: Sumitomo and Itochu are keenest, according to the paper.

Less likely would be a share sale to another non-Japanese automaker. Speaking in August before the current speculation, Credit Suisse (CS) analyst Koji Endo said any proposed sale to an unwanted suitor would be blocked by Mazda's main bank, Sumitomo Mitsui (8316.T), which would "do whatever they can to prevent this from happening" if they don't favor the buyer (BusinessWeek.com, 8/4/08). Given these factors, a Japanese buyer seems most likely.


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