This article appeared today on The Economist website and provides their typically British spin on the automotive industry in Britain sometimes to the exclusion of others. Included here with VehicleVoice commentary.
But who will buy it?
Beauty on the Block
August 30th 2007
From The Economist print edition
A new car and six potential buyers signal hope for Jaguar
EMOTION is said to play a part in many car purchases, but it is less likely to be a factor when buying a car company. Even so, the reaction this week to the first pictures of Jaguar’s new XF saloon will have done nothing to still the beating hearts of the half-dozen or so likely bidders for Jaguar and Land Rover, the two British marques being auctioned together by their beleaguered owner, Ford.
It would be hard to exaggerate the importance to Jaguar of the XF, which is certain to be one of the stars of the Frankfurt motor show in September. It represents a complete design departure from the frumpy “retro” look with which Jaguar has saddled its often well-engineered saloons for the last decade. If the XF’s swooping lines and elegantly modernist interior are a hit with younger customers who would never previously have thought of owning a Jaguar, then the firm, under new ownership, may have a future after all.
– In our story of August 28, the XF represents a potential saviour for Jaguar – a car that is coveted by buyers of mid-size luxury cars the world over. As we mentioned then, Ford may be getting out of Jaguar just as it turns the corner. Of course, the very conservatively styled, but excellent, XJ premium luxury entry needs to get an injection of XF DNA the next time it is freshened and that is years off.
Although Ford has refused to name the prospective buyers, they include Tata Motors (a division of Tata Group, an Indian conglomerate), probably another Indian car company, Mahindra & Mahindra, and at least four private-equity firms. These include Cerberus Capital Management (which relieved Daimler of Chrysler), One Equity Partners, Ripplewood Holdings, and Texas Pacific Group.
All the bidders are now deep into due diligence as they prepare to table non-binding offers at the end of September. As well as poring over the books, they are touring facilities and examining plans for future products. They are also competing in a beauty contest for the backing of potentially hostile unions, which fear for the jobs of 19,000 members employed in several British factories. Ford is publicly confident of concluding a sale by early next year at the latest. But reaching a sensible valuation of the two marques, which Ford says must be sold together because their operations have become so tightly integrated, is not proving easy.
VehicleVoice – Don’t forget… The Land Rover LR2 (Freelander II) and Volvo XC60 share a common platform. That’s about the limit of cross marque sharing among Jaguar/Land Rover and other Ford brands. Pulling away from Volvo would be much more problematic for Ford because of cross-platform sharing with Volvo and Ford’s big cars in the USA (Taurus/Sable/Taurus X) and the S60-V70-S60 plus sharing of the European Focus/Mazda3/Volvo C30-S40-V50.
Judging how far the XF will halt the slide in Jaguar’s fortunes—its sales have fallen by almost half from a peak of 130,000 a few years ago—is only one question among many. How long will the weak dollar eat into the sales and earnings of both makers? Is it necessary to have three factories and a separate design centre to build fewer than 270,000 cars a year? What will happen to Jaguar and Land Rover, which make relatively big and thirsty vehicles, if the European Commission goes ahead with its plan to impose upon car manufacturers an average CO2 emission target of 130g/km by 2012? And how will the onset of a global credit squeeze affect what private-equity groups can pay for a capital-intensive business with a time horizon of three to five years?
The answer to the last two questions may depend on the kind of deal that Ford is prepared to do. All the possible bidders seem likely to want something similar to that wrung from Daimler by Cerberus. The German firm not only agreed to hold on to a 20% equity stake in Chrysler, but also provided substantial financing. Any new owner will want to ensure that Ford retains an interest in the future of the business, in part because it may be possible to persuade the commission to count Jaguar and Land Rover as part of Ford’s bigger and more economical range for the purpose of measuring emissions.
As for Ford, its priority is just to get a respectable deal done. Alan Mulally, its chief executive, is adamant that running luxury brands has no part in the company’s future. He also concedes that the credit market’s tightening “absolutely is an issue”. Lovely though the XF may be, Mr Mulally wants someone else to be its proud owner as soon as possible.
VehicleVoice – All true, Economist. But where does that leave Volvo? The rumor mill continues to mention possible sale of Volvo as well, but Volvo is profitable and intimately linked with Ford in a prduct sense. The idea of Ford keeping an equity stake to convince the EU to let Ford’s volumes count against those of Jaguar and Land Rover in emissions regulations is probably absolutely necessary. After all, the present product decisions at Jaguar and Land Rover were made under that scenario – having Ford as a balancer for their worse CO2 emissions.
Automotive News Europe is breathlessly reporting that Ford is to receive at least six bids for its Jaguar and Land Rover operations. AutoNews sources British press – Financial Times, Economic Times and the Daily Telegraph – in lining up the names of the bidders
The bidders include the usual suspects from the capital equity world including Cerberus Capital Management – the new owners of Chrysler Group and Tower Automotive in addition to Delphi and half of GMAC, Ripplewood Holdings and One Equity Partners.
Carmakers thought to be in the running include Hyundai Motors from Korea, Tata and Mahindra& Mahindra from India
Automotive News reports that “Ford said today that it has had contact with interested parties and is evaluating the level of interest, but declined to provide details on the potential bidders or give a timeline for any sale.”
Reports are that the sale price was expected to be on the order of $1.5 billion. Given the price Ford paid for Jaguar (about $2.5 billion i the late ’80s) and Land Rover, this seems to be petty cash. Land Rover is doing very well these days and a price as low as $1.5 billion has to be in recognition of a huge discount assigned to Jaguar. Recent speculation has been that the third brand in Ford’s Premier Automotive Group – Volvo – could bring $8-billion or more should it be sold.
In some ways, we have been remiss with our coverage of the potential restructuring of Ford Motor Company through the sale of Aston Martin, Jaguar, Land Rover and Volvo. Most of the reporting in the popular and business media has been tilting at windmills. Reporters reporting rumors without verifying facts. And the latest twitch that Ford is to soon announce it is selling Volvo may indeed be the same.
Jaguar, Land Rover and Volvo comprise Ford’s Premier Automotive Group and their American headquarters are just five exits south of AutoPacific on the 5-Freeway. Of course, Ford has already sold off Aston Martin for just shy of $1 billion. Is there more to follow? We don’t KNOW, but we have some ideas.
Is the Press Generating its Own News?
If you have followed the business news, the British press has piled on Ford selling Jaguar and Land Rover. Jim Hall’s June 27 story puts much of the rumor blame on Keith Crain’s Automotive News having overreacted to a short blurb in British car mag Autocar. Once AutoNews ran the story everyone else jumped on. Similarly, recent reports have Ford selling Volvo a much larger and more profitable proposition than selling off Jaguar and/or Land Rover. Would there be a likelihood that Ford could off-load all of PAG? Another don’t KNOW, but it would be difficult. More on that later.
Loans Collateralized by Jaguar/Land Rover/Volvo Assets At Risk?
The huge loans Ford took last year used its automotive assets as collateral. That included Jaguar, Land Rover and Volvo. Should Ford attempt to unload those assets, then the basics of the loan would have to be renegotiated. And Ford’s automotive assets without Jag/LR/Volvo or any of the three may not meet the coverage requirements. That’s another don’t KNOW, but a guess.
Unbundling Product Sharing Will be a Problem
Over the years, Ford Motor Company has attempted to make its product development activities more efficient by sharing products between Ford/Jaguar/Land Rover/Volvo/Mazda. In fact, Ford’s super successful European Focus/Mazda3/Volvo S40/V50 platform has resulted in excellent vehicles for each brand. Similarly, the Land Rover LR2 (Freelander II)/Volvo XC60 will be shared. Ford based the Jaguar S-Type off the LS Platform which also yielded the Lincoln LS, the Ford Thunderbird and, loosely, the Ford Mustang.
While these relationships may be maintained or even strengthened if Ford sells-off one or more of the PAG brands, it won’t be easy.
And if Ford gets rid of its PAG brands it will miss out on the revenue and profit potential of the critically acclaimed Jaguar XF sport sedan and the Volvo XC60 Crossover SUV.
We Believe ‘Em, Don’t We?
So, as of July 18, 2007, we believe it when Ford says it is looking at all options, but that the Company has not made a decision to sell Jaguar, Land Rover or Volvo. Think about it this way, Chrysler’s merger of equals with Daimler-Benz was not leaked before it happened. Great security. Similarly, Ford’s acquisition of Volvo came out of the blue. Maybe there is just too much smoke now for there to be any fire.
There have been rumors circulating recently about BMW buying Volvo Cars from Ford. Ford Motor Company stated on May 29, 2007 it is not in discussions with BMW or any other company regarding the sale of Volvo Cars.
But sometimes where there is smoke, there is fire. This rumor has been circulating for a few weeks now. The rumor goes like this… BMW has been conducting due diligence about the possibility of acquiring another brand. Volvo Cars and Alfa Romeo have both been included in the rumor, but Volvo appears to be the strongest candidate.
Why Would BMW Need a Second Car Company?
From 1994 through 2000 BMW owned Rover – including Rover, MG, Rolls Royce, Bentley, Mini, Land Rover and the defunct names Austin, Morris, Riley, Triumph, Wolesley. Whoa, what a lineup!? BMW practically owned the British motor industry with the exception of Jaguar. Termed “The English Patient”, Rover and BMW never gelled. In 2000, BMW sold Rover Cars (MG Rover) to Phoenix Holding Group for £10. They sold Land Rover to Ford for a hefty chunk of change. They got snookered out of the Bentley name and somehow Volkswagen ended up with it. They kept Mini and have made it a great success. They kept Rolls Royce and are presently building modest numbers in Goodwood in sourthern England.
But, BMW needs additional volumes to help its economies of scale. A second company would help BMW in negotiations with components suppliers. Volvo has the heft to help handsomely.
BMW Fiercely Proud of its Independence
BMW is advertising the advantages of its independence. They look down their nose at Lexus – part of Toyota, Infiniti – part of Nissan, Acura – part of Honda, Audi – part of Volkswagen, Mercedes – part of DaimlerChrysler. So, the idea of BMW acquiring some other premium brand has to be considered from the position of strength.
European media reports have speculated that BMW wants to expand its product portfolio, and would like to add a premium brand with front-wheel-drive models to help spread out development costs for its Mini range. (BMW has been spreading some costs already co-developing the new Mini engine with Peugeot).
Volvo could be a good candidate to fill that objective. One of the reasons Ford acquired Volvo was because of its excellent front-wheel-drive large car platform that underpins the S80, XC90, S60, V70, XC70. Ford uses this platform for its Taurus (Five Hundred), Sable (Montego) and Taurus X (Freestyle) vehicle lines. The lower Volvo models have platforms shared between Ford, Mazda and Volvo. How a BMW acquisition of Volvo could untie these relationships must be a central part of any acquisition strategy. (Remember, BMW V8s powered the Range Rover until the 2006 model year – a hang over from BMW’s ownership).
Volvo Part of Ford’s Premier Automotive Group
Ford acquired Volvo in 1999 for $6.5 billion and made it a cornerstone of its Premier Automotive Group which also includes Jaguar and Land Rover (purchased for $2.7 billion in 2000). Ford has sold the fourth PAG brand – Aston Martin – to investors for slightly less than $1 billion. PAG lost $327 million in 2006.
Reports say that Merrill Lynch estimates Ford could raise over $9 billion by selling the remaining PAG brands.
Nobody’s admitting anything yet, but lets see if the denials hold up over time.