NEW DELHI :
First, Cyrus Mistry was forced out of the Tata Sons board. Now the Shapoorji Pallonji (SP) Group is on its way out entirely. It issued a statement on Tuesday that a separation of interests was the best solution for both the groups.
The nitty-gritty of how the separation will be worked out is not clear, and it is likely to be a long-drawn process.
The SP Group has said it believes its 18.4% stake in Tata Sons is worth ₹1.8 trillion, based on the value of the underlying operating companies, as well as the value of the Tata brand. The Tata Group is likely to throw in things such as debt, holding company discounts, and whatever else it takes to drive the valuation down. It also has the upper hand on the negotiation table—the SP Group is desperate for cash, and there is no market for the unlisted Tata Sons shares.
“The primary hope for the seller is that the famed ‘values’ of the Tata Group will help them get a somewhat fair deal,” says the head of research at a multinational brokerage.
“With most other Indian promoter groups, the hope of getting a fair deal in such a situation would be very low,” he adds. This is ironic, of course, because the SP Group has gone to town the last few years raising doubts about the group’s values.
Parting ways may well turn out to be a catalyst for the Tata Group, which has lagged in terms of generating decent returns vis-à-vis broad benchmarks such as the Nifty, leave alone close competitors such as the Reliance Industries group. It may be forced to part with some of its holdings in the golden goose, Tata Consultancy Services Ltd (TCS). This may result in more discipline in the oversight of other operating companies, say some analysts.
“The Group will no longer be able to stay hinged on TCS’ performance—other companies of the Group will have to perform, or in some instances, perish. The performance pressures will likely drive cultural change: one that is tougher and more commercial,” Institutional Investor Advisory Services (IIAS) said in a note.
If some financial investors are roped in to fund the buyout of the SP Group, that may lead to increased discipline in the Group as well. But if there is no culture change, as IIAS mentioned, the Tata Group will end up worse-off, as it will have reduced financial flexibility alongside legacy problems.
The SP Group has an effective stake of 13.3% in TCS, which is nearly half of the existing free float in the stock. A share transfer of this magnitude can impact valuations, depending on how much is eventually offloaded in the secondary markets.
Whether it invites a new minority shareholder or not, to bridge any funding gap, the Tata Group should look for ways to improve governance across the group, with a view to drive returns for shareholders in all companies, rather than just a few.