NEW DELHI : First, Cyrus Mistry was kicked off the Tata Sons board. Now the Shapoorji Pallonji Group (SP) is completely disappearing. It issued a statement Tuesday that the separation of interests was the best solution for both groups.
The nitty-gritty of how the separation will be resolved is unclear, and is likely to be a lengthy process.
The SP Group has said that 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. Tata Group will likely add things like debt, holding company discounts, and whatever else is necessary to lower the valuation. He also has the upper hand at the negotiating table: The SP Group is desperate for cash and there is no market for the unlisted shares of Tata Sons.
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“The main hope of the seller is that the famous ‘values’ of the Tata Group will help him get a fair deal,” says the head of research at a multinational brokerage.
“With most other Indian advocacy 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 come to town in recent years raising doubts about the group’s values.
The parting ways may well become a catalyst for Tata Group, which has lagged behind in terms of generating decent returns compared to broad benchmarks like the Nifty, not to mention close competitors like the Reliance Industries group. It may be forced to divest some of its interests in the goose that lays the golden egg, Tata Consultancy Services Ltd (TCS). This may result in greater discipline in oversight of other operating companies, some analysts say.
“The Group will no longer be able to depend on the performance of TCS; other Group companies will have to surrender or, in some cases, perish. Yield pressures will likely drive a cultural shift – one that’s tougher and more commercial, “the Institutional Investor Advisory Service (IIAS) said in a note.
If some financial investors are committed to financing the purchase of the SP Group, that may also lead to greater discipline in the Group. But if there is no culture shift, as the IIAS mentioned, the Tata Group will end up worse, as it will have reduced financial flexibility along with legacy problems.
The SP Group has an effective participation of 13.3% in TCS, which is almost half of the existing free float. A stock transfer of this magnitude can affect valuations, depending on how much is ultimately discharged in secondary markets.
Whether you invite a new minority shareholder or not, to close any funding gaps, Tata Group should look at ways to improve governance across the group, with a view to generating profits for shareholders of all companies, rather than just a few.
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