Is Tata about to float JLR?
JLR, remember, contributed a whopping 95% of the overall profit of Tata Motors in the last quarter. The reports suggest that a minority listing for JLR would enable Tata to bank a decent profit on the $2.3 billion purchase price that Tata paid for JLR back in 2008.
With no replacement yet found for the CEO of Tata Motors, who stepped down last September, the view in such pieces is that instead of searching for synergies, Tata could split JLR out and sell off a minority of its shares through an initial public offering (IPO). That could raise cash and help Tata pare down its $4 billion debt.
In addition, a stock market listing would not mean JLR severing its Indian links as Tata would remain the majority owner, and JLR could still look to expand sales and assembly in India.
So far so good, perhaps. But would a listing in fact mean Tata was getting ready to cash in on its 2008 purchase of JLR and get out completely while the going seems good?
Here the argument is that so far Tata has ridden on the back of Ford's huge investments in new models (the XF, the XJ and the Range Rover Evoque) and is now effectively on its own. Hence the recently announced doubling of investment in new model development (which I didn't quite understand as I thought Tata/JLR were already investing £1.5 billion a year anyway).
One critical commentator (Paul Kelly) on my regular blog noted as long back as mid 2011, 'the word of those in the know is Tata is planning a float, effectively a sale of JLR in 2012. A company wishing to sell something... will put the best shine on the thing it's trying to hock. This is what is happening with JLR and its '1 billion pounds profit'... but I doubt Tata will manage the same in 2012. They're stuck with a rapidly depreciating 'asset' that needs ultimately tens of billions of pounds of investment over the next decade, to compete, let alone surpass, the big three Germans - BMW, Mercedes-Benz and VW Group. Tata ain't going to do it (invest tens of billions of pounds over a decade horizon), and those who really know the industry know it too, hence the plan for a stock market float or trade sale in 2012.'
And more recently Paul has offered an interesting perspective in a comment on a recent blog (which can be read here - scroll down to the comments). He is effectively suggesting a 'pump and dump' operation, with Tata talking up the 'asset' - JLR - to be got rid off ('pump'),then leaving it in the hands of punters through an IPO ('dump').
Where this line of argument is right is that Tata/JLR are indeed now effectively on their own after reaping the benefits of massive Ford investment in new model development, and that from here on in big money will be needed to develop new platforms and engines, including a much-needed entry-level BMW 3-series competitor for Jaguar.
What's right as well is that JLR as it is currently set up is too small - producing some 300,000 units at best this year against BMW at well over 1 million, and its exceptionally large margins on cars produced in the last quarter (at some 20%) may well not be sustainable over time. Over the medium term I'd argue a scale of 600,000+ at high margins is needed to get to a sustainable position in terms of cost recovery of investment in new models and engines.
What's also right is that the Reuters piece may well indeed be a kite-flying exercise by Tata to see what the reaction is like.
But where I start to disagree with Paul is that Tata's track record with its major acquisitions is actually as a long-term, committed owner as long as there is growth potential. And I don't doubt that's the case with JLR as well given the latter's success in emerging markets. Indeed, Tata has committed serious money to JLR so far. What's not so clear is whether it can do that for the long-term purely on its own.
So, while a float may seem possible - even likely - I still think Tata will keep a majority stake and look for outside investment, and indeed partners for JLR in terms of engine and new model development (BMW is already cooperating with Peugeot on engine development, Daimler Benz with Renault-Nissan, Bentley and Porsche can draw on key VW technology and so on).
In this sense, floating off JLR might not be bad for the car maker as long as Tata remained the majority owner, thus ensuring no battles for control or infection of short-termism (a killer in the auto industry where long-term, committed and patient financing is needed to bring new cars to market). After all, it was activist investors who pressed for a demerger of Cadbury Schweppes which ultimately led to Cadbury being vulnerable to take over as it was so small.
So, yes a partial float may be on the cards, with Tata retaining majority ownership. The latter is critical for JLR staying as one entity and continuing to invest for the long-term.
Professor David Bailey works at Coventry University Business School.