Detroit's Worst-Kept Secret

Everyone knows that Ford wants to sell Jaguar, Land Rover, and Volvobut can it afford to be picky about who buys them?

Ford Motor (F) has been looking for buyers for its troubled Jaguar and Land Rover brands since last fall. But recent media reports that the automaker has engaged Goldman Sachs (GS), Morgan Stanley (MS), and HSBC (HBC) to screen buyers for the British luxury brands—indeed, the entire Premier Auto Group (PAG) including Volvo—and that it has been in talks with Fiat (FIA) to buy the British brands, have fanned the flames of speculation that Ford will almost certainly unload its luxury brands.

It is highly unlikely that all three brands would go to the same bidder, because while Jaguar and Land Rover share many operational efficiencies, Volvo does not. And there is far more likelihood that Jaguar and Land Rover will be sold and that Volvo will remain under Ford's umbrella. The British press has reported that British private equity firm Alchemy Partners is readying a bid for close to $6 billion. Alchemy tried to buy the British Rover Group fromBMW nearly a decade ago. But it was outmaneuvered by another British investment firm, the Phoenix Group.

Billions Lost Despite Best Efforts

Ford has been toiling to restructure, retool, and reorganize Land Rover and Jaguar for years. Dragged down principally by Jaguar, PAG as a whole has lost billions over the last decade. Land Rover, say Ford officials, is posting an operating profit these days largely on the popularity of the $57,950 Range Rover Sport, whose high profit-per-vehicle is making up for losses elsewhere.

Ford has been knitting together as many engineering and production synergies as possible between Jaguar and Land Rover to lower costs, including sharing engines, transmissions, and purchasing. But Land Rover is still saddled with its out-of-date and overstaffed Solihull manufacturing complex in Britain. High labor costs, a weak dollar, and a strong British labor union that often makes it impossible for automakers to close unneeded plants have made a more meaningful financial turnaround elusive.

Jaguar has been equally beset by too much production capacity, especially the Halewood (England) plant that used to make Ford Escorts. Under former Ford Chief Executive Jacques Nasser, Halewood was moved from Ford of Europe's books to PAG's, and the plan was for the large plant to turn out more than 100,000 Jaguar X-Types per year. The X-Type was not a success, though, and Jag has been stuck with the consequences ever since. Now, Ford is also building the new LR2/Freelander sport-utility vehicle in Halewood to improve the plant's bottom line.

A Return to the "Blue Oval"

But Ford is not in a position to take chances on the success of those brands when the rest of the company is literally fighting for survival. Ford CEO Alan Mulally, who took over last September, is no fan of the luxury brands, including Volvo, which he sees as being at odds with Ford's culture and operating mission. "We have to get Ford aligned with itself globally and focus on polishing the Ford blue oval," Mulally said in a recent interview with BusinessWeek. The CEO says with much less enthusiasm that Ford "is committed to Jaguar and Land Rover and the product plans in place." But it has been an open secret that the British brands in particular are for sale.

Alchemy's anticipated price of nearly $6 billion for Jaguar and Land Rover could be overpaying. One senior PAG executive who asked not to be named thought a buyer could have both brands for "a tuppence."

Ford management and the board are motivated sellers, but they want to see some return for the billions invested and lost in Land Rover and Jaguar. Because Ford would have to continue to supply engines and other support to the buyer, it is likely that Ford would retain 10% to 20% of the brands, as it did when it sold Aston Martin to a private equity investor earlier this year.

Reasons to Buy

Both Italian automaker Fiat and French automaker Renault have denied in recent days that they are in active discussions with Ford. Fiat, according to a press report, backed off because acquiring the brands would lower its credit rating. Renault would probably face the same issue. Renault CEO Carlos Ghosn told BusinessWeek last September that he would like to talk to Ford about the British brands(see, 9/25/06, "Grading Ghosn"). But he publicly said last November that he was no longer interested.

Why all the interest in two unprofitable, troublesome British brands? No doubt Alchemy is interested for the same reasons it acquired Land Rover: It's motivated partly by British nationalism and partly by the opportunity to siphon off some profit after Ford has already done a lot of the heavy lifting in terms of restructuring. Alchemy management, for example, believes it is in a better position than Ford to extract concessions from British labor. Then it can capitalize on milking the new-product investments Ford has already made before potentially selling the brands off to Chinese automakers. Ford is forever hamstrung with British labor and the British government over reductions because Ford is the biggest automaker in Britain. And if labor doesn't get the deal it wants at Jaguar and Land Rover, it can threaten strikes at Ford's other plants.

Press reports out of Sweden last month said that Ford was in talks to sell Volvo to German automaker BMW. Both companies issued statements denying the reports.

There is no question that Ford is interested in selling all three brands, but only at the right price. The automaker lost $12.6 billion last year and has mortgaged its buildings and intellectual properties to amass enough cash and credit lines to see it through continued losses this year and next year. The company projects it will be profitable by 2009. Even so, a $6 billion jolt to its reserves from the sale of the British brands and a possible $7 billion to $9 billion jolt from the sale of Volvo would be a welcome cushion. And Mulally would likely jump at the chance to unload the brands for real cash. It would also solve part of Ford's problem, as CEO Mulally sees it, of being too distracted by businesses and brands that have little to do with Ford's recovery. The new CEO is focused like a laser on beefing up the Ford brand to compete globally against Toyota Motor (TM).

Misguided Motivations?

What is fascinating is the interest that so many companies have in these established brands. Toyota, the industry's profit leader, has been almost religious in ignoring the temptation to buy other brands. In the last 20 years, Toyota has launched the Lexus luxury brand and the Scion niche brand. Both have been runaway sales and profit successes (see, 6/7/07, "Toyota, Take the Wheel"). Meantime, Daimler (DCX) was burned by its $38 billion acquisition of Chrysler, which it recently sold to private equity, and Ford has suffered after buying its stable of European brands.

Automakers steadily benchmark Toyota's manufacturing and production systems. Surprisingly, the Japanese company's savvy for not making acquisitions and building new businesses with a clean sheet of paper are not often emulated. Toyota is so protective of its systems and culture that it has never shown any interest in buying another car company outright.

Ford management was beguiled by Jaguar in 1989 when General Motors (GM) was showing interest in buying it and its own Lincoln premium brand was slipping badly. Ford had high-ranking executives of British birth who were enamored of Jaguar despite its poor quality and ancient manufacturing facilities. It got the itch to shop for brands again in 1999 and 2000, when it acquired Land Rover and Volvo. Now Ford is hoping that there are buyers out there who have still not gone to school on Ford's mistakes or Toyota's success.

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