Tata's drive into Britain

Tata Group just can't get enough of the UK. Less than a year after it completed the audacious £6.7bn takeover of Corus, formerly British Steel, India's largest private industrial group and long-time owner of Tetley Tea has set its sights on another pair of iconic British brands: Land Rover and Jaguar.

According to sources close to the situation, Tata Motors, the conglomerate's auto arm, is the front runner in the $1.5bn auction of the car makers, which are being auctioned by their ailing American parent Ford Motor Co. Said one source involved in the auction: "They are very serious. They are definitely the favourites at this point."

If Tata manages to nab the luxury marques, it would be a feather in the cap of Ratan Tata, the septuagenarian chairman who has led the company since 1991 and overseen its aggressive expansion abroad. The auction can be seen from many angles. From Ford's perspective, it is an admission of failure. The Detroit giant bought the companies in the hope of mounting a serious challenge to big luxury car makers like BMW. It will absorb a massive loss to get rid of them. (In an intriguing twist, Jacques Nasser, the former Ford chief who was ousted in part due to that failed strategy, is now trying to buy them back though the buyout firm One Equity Partners). For the UK, the predicament of Land Rover and Jaguar – the former just breaks even or is slightly profitable, the latter loses money – can be seen as another example of the slow, intractable dwindling of British industrial groups that have failed to keep up with the increased demands of the globalised economy. "It's the classic British problem. They make highly recognisable cars that have very good engineering, but they are sold in tiny numbers," said Hilton Holloway, associate editor of Autocar.

And for India, the possible deal is further evidence of the evolution of many of its larger companies as they strive to move up the economic food chain, from their traditional strengths as cheap service providers and manufacturers to what they now aspire to be, providers of higher-end, higher-value design and consulting. Tata is the most respected and most aggressive of this breed.

After expressing his initial interest in Land Rover and Jaguar, Mr Tata has said little specifically about the British marques. His recent public comments have been restricted to the respect he holds for British automotive prowess. "The UK has a tremendous automotive industry and a tremendous automotive capability. We hope to have a greater presence in the automobile field in the UK," he said recently.

In the UK, Tata has been at this for a while. It was 100 years ago that Tata took its first tentative step outside its native Indian market when it opened a modest trading office in London. Its acquisition of Tetley in 2000 for $435m was the largest foreign acquisition by an Indian company up to that point. When it beat Brazil's CSN for Corus in January, the £6.7bn price tag set a new high water mark for Indian buyers. Today the UK is its single most important foreign market – roughly a quarter of Tata's $48bn in annual revenue comes from the UK. It employs 30,000 people in the country.

Some have questioned whether the acquisition of a pair of legacy, high-end car makers with heavy cost bases fits with Tata Motors' strategy of making affordable cars for the developing world. Next year, the company expects to launch its "one lakh car" – one lakh is 100,000 rupees, which equals about £1,250 – which it hopes will revolutionise the car market not only in India but abroad as well.

Sam Mahtani, head of emerging markets equities at F&C Investments, said: "This is really a major change in terms of that particular strategy, so it would be a major deal if they take it. The market is asking the same questions: Can they turn these operation around, going into different markets, with slower growth and more competition, and very big competitors?" Tata Motors shares, traded on the Bombay Stock Exchange, have underperformed their peer group since its int-erest in the British companies was revealed.

Given the weakness of the dollar, the currency in which sales are recorded, Land Rover and Jaguar are in a particularly perilous state as they pay for production in pounds. Yet as Tata seeks to expand into new markets, the expertise and – perhaps equally importantly – a well known brand, would give it a crucial entrée into new markets.

Tata is bidding against three American private equity firms: One Equity Partners, the buyout arm of JP Morgan Chase that now employs Mr Nasser; Ripplewood Holdings of New York; and TPG Capital. All of them would have to raise significant amounts of debt to finance a transaction. Given the poor state of global credit markets, and doubts about lending to a pair of struggling car makers that would end up as standalone entities rather than as part of a larger parent, the financial buyers are at a distinct disadvantage to Tata.

As a trade buyer, it already has a significant manufacturing base it can draw on. Its unique ownership structure also helps. Tata Sons, the main holding company, owns stakes of varying sizes in 23 publicly listed Tata companies. Tata Sons is in turn two-thirds owned by two charitable foundations endowed by members of the Tata family. Tata Motors could use a combination of its own cash or debt and cash from Tata Sons, a formula it used to buy Corus, to finance the takeover. "They can just write a cheque. The private equity boys are going to have a harder time raising debt," said the source.

The Transport and General Workers Union is understood to be more comfortable with the idea of Tata taking over the companies than it is with the prospect of them falling into the hands of private equity firms. Its hands-off approach to its other UK companies has helped. Though it has been less than a year since it took ownership of Corus, no plant closures or plans to do so have surfaced. Tetley has grown under Tata's stewardship and the same management team that was in place when Tata took it over in 2000 runs the company today.

Tata's long-standing partnership with Fiat is also crucial. It is understood that earlier this year Fiat looked at buying Land Rover but shied away because the price would adversely affect its credit rating. If Tata were to acquire the marques, Fiat could collaborate by providing components in exchange for a share of revenue. It may even buy a minority stake.

One of the major problems for Land Rover and Jaguar is that because of the relatively small volumes they produce, the components are too expensive. The help of Fiat, which could for example provide some parts used on its Maserati models to Land Rover, could reduce that burden. There is also a sense that Tata thinks it could do a better job than Ford has done with the business. Mr Mahtani said: "At the end of the day, these two businesses need management. They are good brands and the products are well-accepted. They need to be managed more efficiently, and that's what Tata thinks it can bring to the table."