Subprime woes may hit Jaguar, Land Rover valuation
The Economic times :August 23,2007
The subprime crisis that has hit the global markets is likely to take its toll on the evaluations for Jaguar and Land Rover deals. The credit crunch is also expected to affect private equity funding. The crisis may even push the date of closing the deal to the end of the year. Ford may have chosen the new owner for Jaguar and Land Rover by the time it reports its third-quarter results in October.
Presently, the deal is valued at around $1.5-2 billion.
“The credit crisis will hit all, including the private equity players, who will be less disposed to be generous. Which means the deal valuation may come down accordingly,” said an MNC consultant.
However, a Delhi-based MNC consultancy auto head said the credit crunch in the global markets will not pinch private equity funding. So if the Tatas or Mahindras are tying up with a PE player, their funding won’t be at risk. “On a macro level, it is the hedge funds which are more at risk. As far as Jaguar-Land Rover deal goes, the only PE players interested would be those looking at a longer time frame due to restructuring restrictions by unions and the British government,” he added.
Longterm players will not be affected by the short-term credit crisis.
Tata Motors and Mahindra & Mahindra officials were not available for comment.
Normally, private equity players are more aggressive in leveraging their transactions than strategic players. While strategic buyers, especially from India, go in for a debt equity of around 1:1, in the case of private equity in some of the global transactions, it has gone up to 70:30.
The Tata group’s earlier big ticket acquisitions
were done on a non-recourse basis. “With the Corus deal, the group created an SPV and leveraged
the cash flow of Corus,” said a Delhi-based MNC consultancy firm consultant. He said the group is sitting on a billion dollars post Tata Tea’s Glaceau sale.
And if nothing else, they can sell a small portion of the Tata Sons’ 80% stake in TCS to raise the required funds.
Industry analyst indicate that due to the high cost of borrowing, a company would now go in for lesser debt, though earlier it may have gone for 90-95% debt. Also, many buyers cannot even tap the debt market and it is getting increasingly difficult for banks to underwrite debt. “With the secondary debt market dried up, companies going in for big ticket acquisitions may adopt a wait-and-watch policy,” said KPMG corporate finance head Rohit Kapur. “It also depends on the mindset of the seller. In the present case, if Ford is in a rush to take the assets of its balance sheet, then valuations will be lowered.
The buyer may chip in more equity, impacting returns in the long-run,” Mr Kapur said.
What could also affect the deal is the increase in debt funding costs for all players on the back of subprime crisis. Pricing for credit has generally gone up by around 25 basis points even for some of the better rated borrowers. In case of leveraged transactions, specially for high yield (junk bond financing) it has gone up by at least 50 basis points in the past one month.
According to bankers some of the deals could go through as even though the cost of financing has gone up, valuation expectations have gone down. Bankers expect a clarity to emerge in the next one month.
According to New York Times website, Ford expects offers for the two British brands to come in by September 30, and could decide on the winning bidder within 10 days to two weeks after that.
