Credit crunch may spoil Jaguar-Rover valuations

Valuations of the Jaguar-Land Rover deal are likely to get affected due to the raging subprime crisis in the US, which has hit global credit markets. The crunch is also expected to affect private equity funding, say industry sources. According to an MNC consultant, the crunch may impact the valuation of the deal itself. The deal size is valued between $1.5 billion and $2 billion.

“The credit crisis will hit everyone including private equity players who will be less disposed to be generous. Which means the deal valuation may come down accordingly.” However, according to another auto head of a Delhi-based multinational consultancy, the global credit crunch 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, hedge funds are more at a risk. As far as the Jaguar-Land Rover deal goes, the only PE players interested will be those looking at a longer timeframe due to restructuring restrictions by unions and the British government,” he added.

But long-term players will not be affected by the short-term credit crisis. Industry sources, however, indicate that the credit crunch situation may push the date of closing the deal to the year end. Ford may have chosen the new owner for Jaguar and Land Rover by the time it reports its third quarter results in October. However, according to The 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.

Tata Motors and Mahindra & Mahindra officials were not available for comment. Normally, PE players are more aggressive in leveraging their transactions than strategic players. While strategic buyers, especially from India, go in for a debt-equity ratio of around 1:1; in case of private equity, in some of the global transactions, it has gone up all the way to 70:30. The Tata group’s earlier big-ticket acquisitions were done on a non-recourse basis. “For the Corus acquisition, the group created an SPV and leveraged the cash flow of Corus,” says another consultant with a Delhi-based MNC consultancy. He added that the group is sitting on a billion dollars after Tata Tea’s Glaceau stake sale. If nothing else, they can sell a small portion of Tata Sons’ 80% stake in TCS to raise the required funds.
Sources indicate that earlier, if a company went for 90-95% debt, now it will go for less debt due to the high cost of borrowing. Also, many buyers cannot even tap the debt market and it is getting increasingly difficult for banks to underwrite debt.

Source: ET