Thursday, October 16, 2008

Ford Still Shopping Mazda Stake; Tata Uninterested

Ford Still Shopping Mazda Stake; Tata Uninterested

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 (, 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 (, 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 (, 1/31/07), and in March, Tata Motors paid $2.3 billion to Ford for the Jaguar and Land Rover brands (, 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.

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