Tata SP Group Deal – Good start, but the devil lies in the details

There seems to be some indications of the fracas between the Tata group and the Shapoorji Pallonji group coming to an amicable end. While the progress is good, the real devil in this entire story will lie in the fine print.

Time for the two groups to get back

There are several reasons for the two groups to finally smoke the peace pipe. Firstly, it started off as a direct confrontation between Ratan Tata and Cyrus Mistry. Both are not around any longer. Secondly, as two of the oldest Parsi business families in India with a legacy of more than 100 years, even the trusts do not want this fracas to continue. Thirdly, the presence of Noel Tata at the helm of the Tatas should be the big difference. Apart from being part of the Tata legacy, he is also related to the Shapoorji Pallonji family through his marriage to the sister of Cyrus Mistry. Timing for the deal is absolutely ripe!

Listing of Tata Sons may not happen now

One of the recent developments that had given hope to the SP group was the mandatory listing of Tata Sons. That would have given the much-needed exit route to the SP group from Tata Sons. The debt of the SP group currently stands at ₹60,000 crore and the group has been borrowing at a cost of over 18% in recent months to bridge this gap. That is obviously not sustainable. The latest amendment to the Large NBFC rules has not resulted in any commitment from the RBI that Tata Sons has to be listed. For now, the uncertainty is likely to continued and that allows the government the luxury of not taking a decision on a highly sensitive issue. It is in this context that the new deal must be seen?

What is the likely SP-Tata deal all about?

According to sources within Tata Sons, N Chandrasekaran has been tasked with the job of finding an amicable resolution to the 18.4% stake held by SP group in Tata Sons. Let us put some numbers to this stake. If you just look at the value of holdings of Tata Sons in listed group entities, that would be worth around ₹11.96 trillion. About a year back, this value would have been closer to ₹15 trillion, prior to the sharp TCS correction. An 18.4% stake would be worth around ₹2,20,000 crore. This will need adjustments for fall in price, large block sale, brand value surrendered, value of unlisted businesses like airlines, semiconductors, digital etc. The final calculation would be a lot more complicated.

Less of cash and more of stock swap

The plan is that; whatever value is agreed upon, will be paid partly as cash and substantially as a swap of Tata group shares in lieu of Tata Sons stake. The real devil will be in the details. What cut-off date to use to value the shares? How to adjust for brand value? How to adjust for holding company discount? How to value the unlisted businesses of Tata Sons? Should it be a tranche monetization or full monetization? Should SP group be allowed to retail partial stake in Tata Sons, or not. These are complex matters and both groups have to buy-in. That will entail a lot of diplomacy from both sides. The good news is that the long process of rapprochement has finally started!