Two days after the Shapoorji Pallonji Group of the Mistrys caused a flutter by finally declaring they would like to exit Tata Sons, market circles and leading shareholder advisory firms believe that while the issue of valuation holds the key, it may not lead to protracted wrangling between the two sides. Some are hoping for the matter to be resolved in around six to eight months.
While arriving at a common ground on the valuation of the 18.4% stake held by the Mistrys would be critical for a solution, shareholder advisory firms are hoping that the matter could be resolved with the help of mediators appointed by both sides. The Tata group and the Mistrys have enormous clout in the business community and corporate circles are hoping that with both sides broadly in agreement—the Tata group open to buying the stake and the Mistrys open to selling it—an end to the four-year-old bruising face-off could finally be in sight.
“Let’s face it. Litigation is good for no side. The Tata group can either fight it out in courts till the cows come home, or settle this and move on with their business strategies. For the SP Group, too, it makes sense to end this at the earliest, and get in the cash since cash is king in today’s context,” Anil Singhvi, founder of shareholder advisory firm Institutional Investor Advisory Services (IiAS) tells Fortune India. Singhvi says while the Tata group can then get on with its business without having to deal with the burden of prolonged litigation, an early settlement would also mean the legacy of the group’s iconic chairman emeritus Ratan Tata remains intact, ready to be carried forward by the next set of Tata leaders. A deal would also be good news for the government in terms of revenue, he adds.
J.N.Gupta, former executive director of stock market regulator Securities and Exchange Board of India (SEBI) and founder of shareholder advisory firm Stakeholders Empowerment Services (SES), agrees that a final settlement may not take too long. “It’s clear that both sides are keen to end this now. The SP Group also needs funds for its own plans. Besides, there is no premium on ownership in this case since there is no change in control here. So it shouldn’t take too long,” Gupta adds.
He reckons that ultimately, the valuation will be based on the need on both sides, and mediators will have to work efficiently to arrive at a final acceptable figure. While the Mistry family has estimated the value of the holding at ₹1.8 lakh crore, the Tata figure could be much lower, if a 2016 estimate by them is anything to go by. That figure, according to reports, was around ₹57,600 crore. Hence, the focus will be entirely on how the two sides arrive at a final figure.
Market circles feel the Tata group may not be open to bringing in private equity firms to pick up the stake since PE firms typically will look at an exit horizon of five years and an internal rate of return of 15%-18%. “That will be like borrowing at high cost,” Singhvi explains. “The Tata Sons articles of association are also restrictive.”
The focus, then, is squarely on the Tata group’s crown jewel Tata Consultancy Services (TCS), which contributes the bulk of the group’s market capitalisation. Five companies—TCS, Titan Company, Tata Consumer Products, Tata Motors, and Tata Steel—contribute the bulk of the group’s market capitalisation, with TCS head and shoulders above the others. Singhvi points out that while the Tata group had unlocked 28% of TCS in a bid to discover value (the group retains a 72% stake in the company), a further dilution to settle the Mistry matter may be beneficial to it. “After all, even with the earlier 28% dilution, there have been investments in businesses which have proved problematic, like AirAsia India and others. Why not dilute further to end the Mistry tangle?”
While Singhvi also calls for a “governance structure” which makes the Tata group more efficient after the Mistry transaction is done, SES’ Gupta says governance is always a perpetual work in progress. “It all depends how far you are from the average, and how far from the top quartile,” Gupta says. He says a business decision needs to be viewed in the context of the situation at the time the decision was taken. “It is not fair to comment on a business decision taken on T+0 date at T+X date,” he adds.
While the market is keenly watching Tata stocks, most key group stocks had a bad day at the bourses on Thursday, in line with the overall markets, with the S&P BSE Sensex shedding a sizeable 1,115 points (or nearly 3%). The TCS stock fell 5.5% on the BSE.
Gupta says a possible way for the Tata group to raise money to buy out the Mistry stake would be to create a special purpose vehicle (SPV) to raise debt through it, buy out the Mistry stake, and then merge the SPV with Tata Sons. He feels entities could also agree to financing at a lower yield given the reputation of the Tata group.
With corporate and legal circles abuzz with talk of possibilities relating to what could well become the Transaction of the Year, every single move by the two sides will now be scrutinised. For both Tata group and the Mistrys, this could well be the one big chance at putting the four-year-long war behind them and chalk out fresh beginnings.