Jaguar Land Rover PLC is one of the largest automotive companies in the United Kingdom which was founded by the merger of the two famous brands Land Rover and Jaguar. Land Rover was then the much popular brand for the first rated and all wheels drive cars and vehicles whereas Jaguar was known for its luxury sports cars with utter sophistication and finesse. The Indian company Tata Motors acquired the company Jaguar Land Rover PLC, and it became its wholly owned subsidiary on March 3, 2015, with the issuance of the bonds for worth $500 Million due 2020 and at a coupon rate of about 3.5 percent annually with interest payments liable semi-annually. Before the acquisition of the Jaguar Land Rover PLC by the Tata Motors, Ford, the then owner of the company approached Tata Motors for the possible sale of Jaguar Land Rover (Sood, Seth, & John, 2010).
The owner of the Tata Motors before acquiring the Jaguar Land Rover embarked on a trip with the chairman and Managing Director of Tata Motors through the US for gauging whether the biggest market of vehicles still evoked enough passion for the British Marques. Even though the company was yielding poor profits and operating losses, the Tata owners were heartened to know that the long-suffering Jaguar Land Rover dealers still have their faith in the company and its revival. After conducting their rounds with the dealers in the UK, Tata was affirmed in the beliefs of their successful acquisition of the Jaguar Land Rover. However, after the acquisition of the Jaguar Land Rover for $2.3 Billion then, it was apparent quickly that the deal could not have been conducted at a much worse time. The financial crisis in US financial market made investors very choosy of their investors, and not many were lending any of the declining automotive industry. Two years passed and the Jaguar Land Rover segment of the Tata Motors was contributing steep rise in its profits. The turnaround is often considered to be contradictory to the norms of the efficient market hypothesis. It is said that such huge turnaround and gains cannot be witnessed in an efficient market. The discussion below is based on these points.
Background
After the renowned deal of Tata Motors of the Jaguar Land Rover in 2015, the analysts considered it at the worst time to make such a huge acquisition. With the looming financial crisis and the decline of the automotive industry, the purchase of a luxury vehicle company by a company which specialized in cheap small cars and trucks was not wrongly considered a bad acquisition. However, Tata managed to convert it in its success and went past to get the success in the industry where others, including the iconic automaker Ford had failed (Mullen, 2013). After the acquisition of the Jaguar Land Rover, Tata Motors has saddled with the debt of R2 21,900 Crores. It is a highly uncomfortable position for a company which was virtually debt free before the acquisition was made.
With the lack of movement of the product, the Tata Motors was feeling stretched with the baggage of Jaguar Land Rover. The stock fell to rock bottom in 2008, and the market capitalization was found to be way less than what Tata Motors paid for the Jaguar Land Rover. The global slowdown in the economy has put Tata Motors under huge pressure. The Jaguar Land Rover, on the other hand, has been undergoing the change management process by getting accustomed to being independent and part of a relatively smaller company. The Jaguar Land Rover needed money, and no one was ready to invest in such crucial time (Oliver, 2012).
It was the time when the owner of the Tata Motors came to help it pumping capital from the mother company in such crucial time and put its belief on Jaguar Land Rover that it would eventually work (The Economic Times, 2018). Even though the turnaround came as a surprise, Tata Motors was expecting it about three to four quarters in advance. However, before reaching such heights, Tata Motors reported its first annual loss in last seven years at least (Muller, 2018).
Problem Statement
Tata Motors act to buy the Jaguar Land Rover in 2008 from its owner Ford Company for a total of $2.3 Billion looked inauspicious at that time. The collapse of the market in 2008 October hit automotive demand globally, and the impact was felt by Jaguar Land Rover as well in the form of a decline in its sales and profitability. In the year 2009, Jaguar, Land Rover reported a loss of GBP 0.40 billion. However, in the year 2011, the Jaguar Land Rover reported newly developed growth and investment strategy which helped growth in retail sales and as a resulted in 5.65 billion of Earnings before tax in the year 2014 (Cato, 2017). Because of this growth strategy due to the loss in the Jaguar Land Rover reported in 2009, the company Tata Company needed financing and additional funds with the issuance of Senior Notes which were worth $ 410 million with a coupon rate of 8.12% that is payable two times each year. The intention of the Tata Motors for the sale of the bond is also linked with the dilution of the debt of USD 2.3 billion, which it took out for the acquisition of the luxury Marques from its owner Ford Motor.
In the year 2013, the Jaguar Land Rover was relatively growing better and founding its stable position as compared to the year 2009. The rating agency Moody’s investors also upgraded the Jaguar Land Rover bond issuance rating from Ba3 to Ba2. The rating agency attributed the ratings to the Tata Motors and Jaguar Land Rover because of the higher free cash flow of the company even with all the increased capital expenditures and increased dividend payouts. This increment in the bond rating of the Jaguar Land Rover led it to repurchase the old company Senior Notes outstanding which were issued at the higher rate of the coupon with the new bonds which were worth $500 Million. These senior rates were issued at a rate of 3.5 percent annually, which is far lower than the last coupon rate of 8.125%. The newly raised funds were received by the Jaguar Land Rover through the issuance of bond intended to be invested in the development of highest quality new vehicles which can compete better with the competing BMW, Audi, and Mercedes.
The incentive earned by the Jaguar Land Rover is considered contradictory with the efficient market hypothesis and biased towards Jaguar Land Rover and Tata Motors. The problem is that such benefits cannot be redeemed in an efficient market. It is because of the inefficient market in which Tata Motors and Jaguar Land Rover operate that it can reap such huge benefits. However, it cannot be said that it was entirely because of this reason. Tata Motors and Jaguar Land Rover sought help and followed the maximum cost cutting and investment in Jaguar Land Rover for benefits to be reaped in 2014. The following data show the data regarding the Senior Notes Issuance and Reference Security.
| Jaguar Land Rover PLC | |||
| Data: | |||
| Senior Notes Issuance | |||
| Issued March 2015 | Senior Notes Issuance | $ 500,000,000 | |
| Due in 2020 | Coupon Rate | 3.50% | Annually |
| Payments Due | Semiannually | 1.75% | |
| Proceeds Used for | |||
| Issued May 2011 | Repurchase of Outstanding Senior Notes | $ 410,000,000 | |
| Due in May 2021 | Coupon Rate | 8.13% | Annually |
| Payments Due | Semiannually | 4.06% | |
| Mar-15 | Price in Luxemburg Bourse with premium | 11% | |
| Reference Security | |||
| Due in May 2016 | Treasury Security | ||
| Coupon Rate | 0.25% | Annually | |
Recommendations
For providing the bondholders with the benefit, we need to assess the indicative price of 2021 Senior Notes issued.
| Indicative Price 2021 | =111.276/100*1000 |
| PV | 111.28% |
The yield to maturity of the bonds 2021 can be calculated at the time of repurchase in the year 2015 to ascertain the offer price for the repurchase. The coupon payment is computed as well. The yield to maturity of 5.87% shows that the bondholder should be demanding a return greater than the Yield to Maturity of 5.87%.
| Yield to Maturity of 2021 Bonds | ||||
| At the time of repurchase | ||||
| FV | PMT | PV | YTM | N |
| $ 1,000.00 | 40.63 | $ (1,112.76) | 5.87 | 12 |
| Coupon Payment: | |
| N | 12 |
| PMT | $40.63 |
For computing the Offer Bond Price by the Jaguar Land Rover, the equation is;
| Bond Offer Price by JLR | |
| Expected Rate of Return | 6% |
| Last Coupon Payment | $ 40.63 |
| Investment | $ 1,112.76 |
| Bond Offer Price by JLR | $ 66.77 + $ 1,075.21 |
| Bond Offer Price by JLR | $ 1,141.97 |
| Premium to be Paid by JLR | $ 141.97 |
It shows that Jaguar Land Rover should offer the bond price of $1141 with the premium paid on each bond equal to $141.96. This amount will ensure that the bondholders also gain some advantage of the sale of the bonds. The repurchase should be thus made at a rate greater than the YTM. The company Tata Motors is expected difficulties in its free cash flow in the following years because of the huge capital expenditures planned. The savings from the change in coupon rate from 8.125% to 3.5% resulted in savings of $62,412,662 adding value to the company free cash flow and liberty for more investments in R&D.
References
Cato, J. (2017, March 25). Why Jaguar is finally thriving (and rolling in cash) under Tata. Retrieved April 24, 2018, from https://www.theglobeandmail.com/globe-drive/news/trans-canada-highway/why-jaguar-is-finally-thriving-and-rolling-in-cash-under-tata/article17678401/
Mullen, E. (2013, September 13). Tata’s Jaguar Land Rover turnaround has created more than 35,000 jobs. Retrieved April 24, 2018, from https://www.birminghampost.co.uk/business/business-news/jaguar-land-rover-tata-turnaround-5920795
Muller, J. (2018, March 7). Jaguar’s Incredible Turnaround And How It Got Ready To Pounce On Tesla. Retrieved April 24, 2018, from https://www.forbes.com/sites/joannmuller/2018/03/07/jaguars-incredible-turnaround-and-how-it-got-ready-to-pounce-on-tesla/#5f6b8dd813c2
Oliver, B. (2012, August 25). Made in Britain. Saved in India. Craved in China: How the Jaguar Land Rover group was saved…by Indian cash and Chinese drivers. Retrieved April 24, 2018, from http://www.dailymail.co.uk/home/moslive/article-2192468/Jaguar-Land-Rover-Made-Britain-Saved-India-Craved-China-How-group-saved–Indian-cash-Chinese-drivers.html
Sood, V., Seth, S., & John, S. (2010, November 14). How Tata Motors turned JLR around. Retrieved April 24, 2018, from https://www.livemint.com/Companies/UhROXPttBWa40lVOgtS6wL/How-Tata-Motors-turned-JLR-around.html
The Economic Times. (2018, March 10). How Ratan Tata brought life to Jaguar Land Rover. Retrieved April 24, 2018, from https://economictimes.indiatimes.com/industry/auto/news/industry/how-ratan-tata-brought-life-to-jaguar-land-rover/triumph-over-humiliation/slideshow/63245739.cms
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