Michael Harrison's Outlook: Jaguar reaches the end of the road as Ford looks for a way to stem the losses

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The Independent Online

For sale: Iconic British car company. Would suit leather (and walnut) fetishist. Germans, Japanese and previous bidders need not apply. May throw in a 4-wheel drive brand as well. All reasonable offers considered.

Has Ford finally decided to chuck in the towel and sell Jaguar after pumping in the thick end of £4bn to keep its very own English patient alive these past 17 years?

If the rumours coming out of Dearborn are correct, then Bill Ford, the great grandson of the founder and current chief executive, has indeed put the future of the famous luxury marque under review.

The Blue Oval has big enough problems of its own to worry about without being distracted by Jaguar's continuing ability to disappoint. Ford paid a ridiculous £1.6bn in 1989 to take Jaguar off Sir John Egan's grateful hands - a figure which included £1.2bn worth of goodwill. Since then, the business has lost money in more years than it has turned a profit.

The crunch came in 2004 when Ford finally bit the bullet, closing down Jaguar's Browns Lane factory in Coventry and recapitalising the business with a further £1.2bn cash injection after suffering a £460m loss. Ford also took the opportunity to jettison the grand expansion plan for Jaguar dreamed up by its previous chief executive Jacques Nasser. Instead of doubling production to 200,000 a year, the new business plan entailed selling fewer cars, but hopefully at a bigger profit.

Just when Dearborn thought the investment was finally beginning to pay off, the Premier Automotive Group, of which Jaguar is a part, turned in a $162m loss for the second quarter of this year, prompting Henry's great grandson to tell Reuters that "nothing is off the table in terms of any of our entities".

In truth Jaguar has never really fired on all six cylinders for Ford. No sooner had its quality problems been ironed out than the business was hit by the vicious headwind of a dollar exchange rate approaching $1.90 to the pound - a killer for any company that exports half its production to the US.

Nor has the product line-up been consistent. For every success - such as the XK sports car which is sold out for the year - there has been a lemon. The retro-style S-type saloon looked more like a frump with a sagging bottom than something Inspector Morse would have been seen in. The X-type baby Jag was little more than a Ford in drag and probably won't be replaced when it reaches the end of the road.

So who might be interested in taking Jaguar off Ford's hands? Toyota has a luxury brand of its own in the Lexus, which competes toe-to-toe with Jaguar in the US, and BMW has already ruled itself out. General Motors is hardly likely to be interested, having lost out to Ford in the original auction and bought Saab on the rebound. The two possible buyers in Europe are Peugeot and Renault, neither of which has a luxury brand. But Ford might have to throw in Land-Rover to make the deal sufficiently sweet.

Then there are the Koreans, who have the ambition and might just make a fist of owning Jaguar. If Ford is really desperate, it could always put a call out to a Russian oligarch. Step forward Nikolai Smolensky, who bought the Blackpool-based sports car maker TVR in 2004.

If Jaguar really is up for grabs, then perhaps the best, if radical, solution is to sell the entire stable of PAG brands, which also includes Volvo, Aston Martin and Lincoln. Separate though the marques may be in terms of market niche, they increasingly share common componentry. The same engines, for instance, power Jags, Land-Rovers and some top-end Volvos.

The man hired by the Blue Oval to do the blue skies thinking is the heavyweight Wall Street investment banker Kenneth Leet. Would-be buyers should form an orderly queue.

How to lose friends and alienate people

Hedge funds aren't in business to win popularity contests. They exist to make money for their investors. Polygon, a particularly aggressive example of the genre, is in danger of failing on both counts. It has upset the majority of investors in Telent, the rump of what used to be the old Marconi telecoms business, by threatening to block the sale of the company to Fortress Investment Group when shareholders vote on the deal tomorrow.

Polygon has manoeuvred itself into this position by borrowing Telent stock from institutional investors in order to vote the shares against the deal. Since John Devaney, the chairman of Telent, blew the whistle on what Polygon was up to a large number of those institutions have called in their loaned stock. The effect has been to force Polygon to increase its economic interest in Telent and thereby its financial risk should the deal fail to go through. Polygon still has a holding of 24 per cent - enough to thwart the sale. But whereas a week ago only 10 per cent of that was owned outright, the amount now stands at nearer 20 per cent.

Being a hedge fund, it is impossible to know how else Polygon might have offset its risk. But on the face of it, Polygon stands to lose money since Telent shares will fall if the takeover collapses. The stock is already trading at a 7 per cent discount to the 529p price which Fortress is offering to pay to reflect the risk premium attached to the deal.

The reason Polygon is threatening to block the sale is that it wants to get its hands on £490m held in an escrow account for the benefit of Marconi pensioners. Not surprisingly, this has made Polygon doubly unpopular with the trustees of the pension fund and the pensions regulator, neither of which it appears to have consulted. Despite this, Polygon seems to believe either that Telent is being sold too cheaply or that somehow the money locked away in the escrow account can be got at.

The Telent board and its advisers say there is realistically no prospect of this. For any of the money in the escrow account to be released, the cost of buying out the pension fund would need to be £500m less than the current estimate. In any event, the pension plan presently has a £102m deficit on a IAS 19 basis which the escrow account was specifically put in place to fund. What trustee in his right mind would agree to take money put aside for the benefit of pensioners and hand it over to an opportunistic hedge fund?

The Telent board seems resigned to the deal falling through unless there is some last-minute change of heart on the part of Polygon, which it appears there won't be.

Polygon's gambles do not always pay off. It lost out last year in a high-profile attempt to thwart the restructuring of British Energy. More recently, it has returned to a losing streak, ending up $8m out of pocket after failing to block the management buyout of a US housebuilder.

Were Polygon to backtrack at the last minute and support the Fortress deal, it would lose credibility the next time it takes an aggressive shareholding in a takeover target. But by sticking to its guns it will almost certainly lose money. Hedge funds are supposed to take risks. It goes with the territory. Nevertheless, you begin to wonder what on the earth those investors who are putting their money into Polygon make of it all.