Buying Ford Motor Co's premium Jaguar and Land Rover brands would catapult Tata Motors or Mahindra & Mahindra onto the global stage, but doubts either Indian automaker can successfully pull off such a deal are weighing on their share prices.
Analysts say even if either firm, known for their sturdy but rather staid trucks and utility vehicles, wins the race for the luxury brands, the acquisition may prove too complex given their other ambitious expansion plans.
Just because something's available, that doesn't mean you have to go out and buy it, said Mohit Arora, managing director for India at research firm J.D. Power Asia-Pacific.
How you integrate something afterwards, and how much freedom you have to do it will be key, he said.
Ford has been exploring a sale of Jaguar and Land Rover, which Merrill Lynch values at up to $1.5 billion, since June and said it expects to close a deal by early next year at the latest.
Sources have told Reuters the three groups left on a shortlist are Mahindra and buyout firm partner Apollo, Tata Motors and JP Morgan-backed One Equity Partners.
Tata Motors and Mahindra already make cars and compete with some of the best global brands in India, but they have little recognition internationally, said Mahantesh Sabarad, auto analyst at brokerage Prabhudas Lilladher.
This way, they can show they're truly global, he said.
TAKING ON TOO MUCH
But investors have given the plan a thumbs down: Tata Motors shares are down 4.7 percent since the first report of its interest in mid-July, while Mahindra shares have lost 9.2 percent in a record-setting share market that gained 26 percent over the same period.
Analysts say there are concerns ranging from funding the acquisition in tight credit markets, to diverting resources from their own ambitious plans in the fast-growing Indian market and beyond, to possible conditions attached to a sale.
Private equity firm Ripplewood Holdings, which was among the initial bidders, told a Reuters Summit at the weekend it did not see the logic of combining ultra-luxury vehicles with ultra-cheap vehicles in one company, and that the brands may be worth more strategically.
Tata Motors, India's top truck and bus maker and No. 3 car maker, is scheduled to launch in 2008 a car priced at $2,500, or less than half the price of the cheapest car currently on the market.
Tata Group Chairman Ratan Tata, who led the company's foray into cars with the indigenously made Indica hatchback in 1999, has said they were interested in the Ford luxury brands to reduce dependence on the Indian market and for a more global presence.
An official at Mahindra, which controls half the market for utility vehicles and makes cars and tractors, told a newspaper Tuesday they were interested in Land Rover's technology.
Jaguar is likely to go to buyout firm Apollo is Mahindra's bid is successful, analysts say.
Tata and Mahindra, controlled by two of India's oldest and best regarded business families, have alliances with global firms and are expanding in overseas markets, while also launching new products and fighting greater competition at home.
Land Rover, if it came at the right price, has the potential to make either of the two firms a serious global SUV player, but Jaguar's benefits were less apparent, said Ashvin Chotai, director for Asian Automotive Research at Global Insight. Both companies have a lot on their plates and it seems like they could be taking on too much with this, Chotai said.
India's booming economy has boosted earnings of companies and given them confidence to expand globally.
Overseas purchases by Indian companies has more than quadrupled to $33.6 billion so far this year from the same period last year, according to data from Thomson Financial.
Among these is the biggest to date, the $13 billion acquisition of Corus Group by Tata Steel Ltd.
The group has a good track record in acquisitions and Tata Motors has been successful in integrating Daewoo Commercial Vehicles (acquired in 2004), said Arora, who believes Jaguar and Land Rover would make better strategic sense for Tata Motors.
Tata Motors could quite easily add Land Rover to its lineup of utility vehicles and SUVs. It could team up with partner Fiat to manage Jaguar, which would be a nice addition to the Italian firm's premium Alfa Romeo and Ferrari brands, he said.
Mahindra, which partnered Ford in its entry into India more than a decade back, has a joint venture with Renault for the no-frills Logan sedan in India. It also has ventures for engines and trucks with a Navistar International unit.
Mahindra aims to quadruple exports and double domestic sales by 2010. It has a manufacturing venture with the Renault Nissan alliance in India for 400,000 vehicles from 2009.
Shares in Tata Motors, which have a market value of $6.9 billion, trade at about 15 times forecast earnings, while Mahindra shares, worth $4.7 billion, trade at 19 times.
The companies and investors need to take a long-term view on this, as benefits will not accrue in FY08 or FY09, said Pradeep Saxena, senior vice president of research firm TNS Automotive.
And if they don't like the way the deal is structured, they should walk away now, he said.
(Editing by Ranjit Gangadharan & Lincoln Feast)