Investors concerned about Tata Motors deal

Investors in Tata Motors are bracing for India's thirdlargest passenger carmaker to begin selling down some of its investments and stakes in subsidiaries to help finance its $2.3bn takeover of the Ford-owned marques Jaguar and Land Rover.

Tata Motors' share price faced renewed pressure yesterday over the deal. Its stock initially fell about 7.3 per cent before recovering to end down 3.6 per cent at Rs655.20.

In a note on the deal, which was formally sealed on Wednesday, Credit Suisse said Tata Motors would probably first offload its holding inTata Steel, India's largest private steelmaker.

"The prime candidate for such a sale would be Tata Motors' stake in Tata Steel, which is worth about $450m at the current market price," said Govindarajan Chellappa, a Credit Suisse analyst.

Tata Motors has said its takeover of the luxury marques will help it develop capabilities in design, technology and distribution to compete with global brands in domestic and international markets.

But the deal has been unpopular with investors since rumours about it began circulating in the middle of last year.

Tata Motors' stock has fallen about 13 per cent since last July. The Sensex Index has gained nearly 5 per cent in the same period, and the benchmark dropped 0.4 per cent yesterday to 16,015.56.

Investors are concerned on three counts: Jaguar is lossmaking; the US market for luxury cars is heading into a downturn; and the brands do not fit the Indian group's stable of low-cost vehicles for the developing world.

They are also worried about Tata Motors' plan to raise $3bn in bridge loans for the acquisition.

Tata Motors has indicated that it will set up a special purpose vehicle to hold Jaguar and Land Rover, which some analysts believe will also assume the debt.

But investors are concerned that the deal will still be dilutive. Tata has announced that it plans to raise $1bn in new equity for the acquisition.

This could be mitigated by a potential plan to sell the company's 4.29 per cent stake in Tata Steel.

Piyush Parag, an analyst with brokerage Religare Enterprise, said Tata Motors might also sell down part of its holdings in some subsidiaries. These include its successful South Korean truck acquisition, Tata Daewoo, and its two large components makers, HV Transmissions and HV Axles.

"Is the deal value accretive?" Credit Suisse asked in its note. "There are too many questions left unanswered to give a definitive answer."

More details were needed on the intellectual property Tata Motors had acquired as part of the deal and on how it planned to turn Jaguar round, the note said.