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SP Group Announces Intention to Sell Its Stake in Tata Sons

Editor, TRANSFIN.
Sep 24, 2020 10:18 AM 4 min read
Editorial

This week, the Shapoorji Pallonji (SP) Group conveyed to the Supreme Court its intention to exit its stake in Tata Sons through a potential buy back, marking a likely end to a partnership dating back to 1965.

This separation could also mark a conclusion to a four-year legal battle between two of India’s oldest and most powerful conglomerates.

But the divorce will most likely not be without commotion. In fact, it too could involve a lot of disagreements and legalese.

Because for one, the SP Group’s Mistry family and the Tatas have different perceptions of the value of the former’s stake.

Second is the question of how Tata Sons can possibly fund this buyout... 

What is Tata Sons Actually?

Just to recap: Tata Sons was established in 1868 as a trading enterprise. Over the years, the company grew and expanded into different businesses, including telecom, airlines, IT services, hospitality, energy etc.

Today, Tata Sons is the holding company for the Tata Group.

SP Group Announces Intention to Sell Its Stake in Tata SonsAnd under the Tata Group, there are many companies - over a 100, in fact - to say nothing of interlocking directorates, and the numerous subsidiaries in India and around the world.

Besides the sheer number of companies and subsidiaries, another factor that further complicates the Tata corporate structure are cross-holdings. Many of Tata’s listed entities have investments in each other, a move to increase management control. But such a practice can also stifle flexibility and create a situation where one troubled entity ends up affecting all the others in the domino chain. But this is something Tata Sons has been trying to rectify for the past few years.

So that’s the Tata business structure. Corporate governance nightmare? Maybe to you and me. But the structure is effectively built with Tata Sons at its apex. The Tata family controls this complicated maze via a few philanthropic trusts (aka Tata Trusts), which have a nearly 66% stake in Tata Sons.

 

What about SP Group?

Now, SP Group has a substantial stake in Tata Sons - 18.37%, to be exact, making it the largest minority shareholder.

In order to pay creditors and fulfil contractual obligations, SP was in the process of pledging its Tata Sons shares to raise ₹11,000cr ($1.5bn). Tata Sons took this matter to the Supreme Court, which this week curtailed the Mistry family’s ability to raise fresh funds, and offered to buy back the stake themselves.

This seems to have been the last straw in the already-fragile partnership.

 

Stake-out

The SP-Tata uncoupling could be court-driven or negotiated by a third-party mediator.

The main challenge, meanwhile, would be to decide on the value of SP Group’s 18.37% stake.

 

What is Tata Sons’ valuation, then?

The Mistrys claim that Tata Sons’ valuation is ₹9.7Lcr ($132bn) and based on this their stake would be worth ₹1.78Lcr ($24.24bn).

Their estimates are based on the 2020 market cap of Tata companies, so let’s see how they pan out.

 

 

The Mistry family values Tata Sons’ stakes in the Group’s listed companies + the unlisted businesses + the Tata brand. But this system is far from symmetric, and it’s highly skewed in favour of one vertical - the listed IT giant TCS.

What’s to note here is that Tata Sons’ stake in TCS alone accounts for 70% of its entire valuation and 87% of its stake in listed entities.

 

 

On the other hand, the Tatas harken back to the holding company’s 2016 valuation, which was pegged at ₹3.14Lcr ($42.8bn). Hence, they contend that SP’s stake is actually worth only ₹57,600cr ($7.8bn) - about 33% of the claimed amount.

FYI: 2016 was the year when Cyrus Mistry was ousted as Chairman of Tata Sons, sparking the long-drawn legal drama between the two families. Naturally it doesn’t help that TCS market capitalisation more than doubled since then :)

 

Where is the money going to come from?

Tata Sons can’t fund the entire buy back consideration from its internal cash.

It would have to consider: 

  1. Selling its stakes in its listed cos (TCS, Tata Motors etc.)
  2. Pledge its shares in listed cos to borrow more - something it has been actively trying to avoid
  3. Maybe raise equity at TCS level to divi it up to Tata Sons to fund such a deal...but why would equity investors into TCS give money to Tata Sons to fund a management buyout
  4. Bring third party investors to buy Mistry out

So, irrespective of today’s headlines - it is not a done deal till it is done. Till then, enjoy the popcorn.

FIN.

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