BMW should buy Jaguar Land Rover from Tata Motors, says Bernstein

Tata Motors may get 9 bn pound valuation.

Business Standard : Tata Motors should look at selling its UK-based subsidiary, Jaguar Land Rover to German luxury car maker, BMW, which could fetch a valuation of 9 billion pounds to the Tata company, global brokerage firm, Bernstein has said.

In a report to its clients, Bernstein said BMW is over-capitalised and is awash with cash. “It (BMW) has run into the limits of growth for its product range and brand. Returns on capital from further expansion look questionable. By contrast, JLR could be acquired at a discount to book value. With BMW's help it could be returned to profitability,” it said.

The Range Rover has huge gross margins but is being swamped by fixed costs and problems on other product lines. BMW could quickly lower JLR’s investment costs and raise margins by leveraging its own platforms, powertrains, purchasing scale and quality control. The value creation would be substantial and could boost BMW earnings by 20 per cent, the report said.

For Tata group, the problems at JLR look daunting, the brokerage said. "It’s been an amazing 10 years, with many successes, but we believe the company needs to find a strategic solution for JLR. Proceeds of £9 billion would mean upside for Tata Motors share price, especially if Tata could articulate how the capital would then be redeployed,” the report said.

Tata Motors had acquired JLR in June 2006 for $2.3 billion and after a long good run, the company is losing money in the recent quarters. In July, JLR had announced that it has joined hands with BMW to develop next-generation electric drive systems and since then speculation is rife that BMW would buy JLR. Tata Motors has denied any talks with BMW for stake sale.

BMW owned Land Rover and the wider Rover group from 1994 to 2000. “It was a traumatic period for the Bavarian company and there are executives in Munich who are still emotionally scarred by the experience. However, we believe the time is right for BMW to revisit ownership of Land Rover, along with its sister brand, Jaguar,” the report said.

The brokerage said BMW is cash rich and has huge resources but seems to have hit the limits of growth with its own brand. Value creative organic growth may be difficult to achieve from here. JLR, on the other hand, is severely challenged, both operationally and financially. But it could massively lower both its fixed and variable costs under the wing of a bigger partner. "BMW has already agreed to supply electric drive units and engines to JLR. But far greater co-operation makes huge sense. In fact, the industrial and financial logic of a full acquisition is compelling," the report said.