Strangely, Ford's 'Buy High, Sell Low' Strategy Could Work

By Mark Whistler | March 27, 2008 AAA

On Wednesday, Ford Motor Company (NYSE:F) announced that it would sell its Jaguar and Land Rover brands to India's Tata Motors (NYSE:TTM). The deal is a fire sale, or garage sale, if you will.

In 1989 Ford purchased Jaguar for $2.5 billion, then, 11 years later in 2000, Ford moved on Land Rover, closing the deal for $2.7 billion. Ford is now letting both brands go for $2.3 billion total. Actually, it's even worse than that; on the close of the deal, Ford will pay $600 million into Jaguar/Land Rover pension funds. With the pension fund contribution included, Ford is really selling both brands for $1.7 billion, one-third the $5.2 billion it originally paid.

Everything Must Go!
What's really going on here is Ford is hurting for cash and needed to make a quick buck.

When looking into Ford's cash position (pre-sale), everything looks rosy with over $20 billion on the books. At least until investors notice the company's debt, which is a staggering $168 billion. The balance sheet is offset with $160 billion in long-term investments, but really, it's just a bad position to be in overall. One helping hand in the deal for Ford is the fact that the company will continue to supply Jaguar and Land Rover with components and powertrains. (To deduce whether a company is generating enough to sustain itself, read The Essentials Of Cash Flow.)

At the end of 2007, Tata Motors was sitting on just under $4.2 billion in debt, with $2.6 billion in current assets. To finance the deal, Tata rolled up support from multiple banks, which will provide financing for 15 months. However, a significant portion of the cash will come from Tata's divestiture of subsidy investments. The Jaguar/Land Rover deal could weigh on Tata, though, perhaps even sucking the company's credit down to 'BB+' status. (To learn about credit status, see High Yield, Or Just High Risk?)

Good Karma for Ford or Tata?
At the end of the day, the deal will help Ford, as the company will be relieved of some of the cash issues Jaguar and Land Rover were causing. However, the company's is still far from "out of the woods", and will likely encounter difficult quarters for a few years. It's important to note that the Tata deal is not expected to close until the end of the second quarter. However, shares are severely beat down since the turn of the century, and for investors who can handle short-term punishment, Ford could still be a long haul winner.

It's too early to call the outcome for Tata Motors. Investors should remember that Land Rover and Jaguar, while pretty to look at, have been cash black holes for several decades. Tata has its work cut out for it. The company has stated that it does not plan on shifting management, closing plants, or cutting workers. But when the deal closes, Tata may sing a different tune.

Bottom Line
Ford's buy high, sell low strategy really stings, but at the end of the day, it was something the company needed to do to relieve pressure within the company. Now, Ford can divert the cash it would have been pumping into Jaguar and Land Rover to its core product lines. While the deal seems like bad news for Ford, it could be a small step toward a completely new chapter at the company, something that could reward investors in the years to come.

For further reading, check out Analyzing An Acquisition Announcement.

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