Tata Motors fends off investor skepticism on $4.4 billion Iveco acquisition
Less than 12 hours after Tata Motors announced its largest acquisition ever, its management fielded questions from analysts and investors over the rationale for the acquisition.
'It is a meaningful, large acquisition… There is an understanding between the two companies to build a business of scale and size,' chief financial officer P.B. Balaji said during the call.
Achieving high growth in the commercial vehicle business isn't easy and India's largest commercial vehicle maker needs such acquisitions to deliver growth to shareholders, the management added.
'Market shares are highly stable in the commercial vehicle business. It is not a very disruptive business. Diversification of cash flows is important to maintain growth in the business,' Balaji explained.
Tata Motors shares were up 0.28% at ₹ 670.30 each in early afternoon trade on NSE.
After the deal was announced late Wednesday, investors noted the possibility of a boost in earnings. But they also raised concerns as previous similar acquisitions—such as that of South Korea-based Daewoo's commercial vehicle business for $102 million in 2004—did not result in meaningful gains in the international markets.
Some investors also highlighted challenges post Tata Motors's acquisition of UK-based Jaguar Land Rover in 2008 for $2.3 billion, and Tata Steel Ltd's acquisition of Corus Plc., also based in the UK, for $13.1 billion in 2007.
'Given the group's challenging experience with Corus and JLR acquisitions, why do you think this is somewhere Tata Motors can create value?,' asked Sonal Gupta, head of research-equities, at HSBC Asset Management India. 'Tata Motors CV (commercial vehicles) has limited international presence. We haven't really been able to capitalize the tech from Tata Daewoo to grow internationally.'
Balaji said Tata Motors's portfolio and business level were close to that of Iveco, an acronym for Industrial Vehicles Corp., and the newly formed entity post the acquisition would invest up to $1.7 billion each year.
'Opportunities like these do not come when you want. You move when such opportunities arise. There was a very small window to get this business,' the CFO told the investors and analysts in attendance.
On the JLR and Daewoo acquisitions, Balaji said JLR was a premium-luxury player and Tata Motors was a mass player at the time of acquisition, resulting in some hiccups, while Daewoo was a small deal limited to a single market.
'We have had our learnings from the experience,' Balaji assured investors.
During Thursday's call, analysts from Morgan Stanley, Kotak Institutional Equities, and Bank of America raised questions about the calculation of free cash flow expectations and potential earnings boost.
Per the company's estimate, Tata Motors and Iveco would have a significant combined global presence, with sales of over 540,000 units and over $25 billion in revenue.
Europe would account for half of the combined group's total sales, followed by 35% in India and the remaining 15% in the Americas.
Tata Motors lined up $4.36 billion in funding from Morgan Stanley Bank NA, Morgan Stanley Senior Funding Inc., and MUFG Bank Ltd for the acquisition, the company said in a statement on Wednesday. The company will look for fundraising opportunities to repay the debt, of which 30-40% will be equity and 60-70% will be debt, it added.
Tata Motors said the acquisition of Iveco will allow the company to enter geographies like Latin America, where it was not previously possible due to fund and network constraints.
In a note on Wednesday, analysts at Nuvama Institutional Equities said the acquisition would lead to an earnings boost for Tata Motors, with earnings per share estimated to increase by 4%.
'However, the key downside risk for Iveco is possibility of a sales downcycle in Europe and US CV markets resulting in lower earnings in near-term,' they wrote.
The commercial vehicle business is the second largest for Tata Motors, contributing 17% to its 2024-25 revenue. However, the business's overall sales volume declined 5%, although exports grew 3%.
Since the first confirmation of advanced talks of a deal between Tata Motors and Iveco on 30 July, Tata Motors shares have fallen by 3% while the Nifty Auto shed 1%.
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