First clash may be over value of stake

Tata Sons’ court filings peg the valuation of SP group’s stake at around 1.5 trillion

Swaraj Singh Dhanjal
Updated24 Sep 2020, 05:52 AM IST
Photo: Mint
Photo: Mint

Differences over valuation, massive capital requirement and the structure of Tata Sons Ltd are likely to be key hurdles in the proposed separation process of Shapoorji Pallonji group from the Tata group.

The first point of friction could be the valuation of the SP group’s 18.4% stake in Tata Sons. While Tata Sons’ court filings peg the valuation of this stake at around 1.5 trillion, the SP group claims it is closer to 1.8 trillion.

“Valuation will be a big issue. That will be the most important challenge,” a senior partner at one of the Big Four audit firms said on condition of anonymity.

According to experts, in case the SP group cannot bring in a buyer who will propose a price for its stake, arriving at a consensus valuation could become a tricky issue.

“Valuation is always a challenge in deals where there is only one buyer. The SP group seems to have a compulsion to sell; so, they will be under pressure when it comes to bargaining for a better value,” the person cited above said.

“The challenge for the SP group is to find a buyer or a consortium of buyers that can offer the value that they are seeking,” he added.

A second person, an investment banker, said arriving at an agreeable valuation could turn out to be a long-drawn process.

“You will have to appoint an independent valuer, ideally one of the Big Four audit firms. Given the scale of the Tata group, especially the long list of unlisted companies, arriving at a valuation could be a long exercise that could take three to six months.

He added that the valuation of Tata Sons could also be impacted by a holding company discount.

“In a holding company structure, one would calculate the value of the underlying assets and then provide for a holding company discount, which could be as much as 20%. If an external buyer has to value it, then they will consider a holding company discount, to account for the leakages when the dividend is upstreamed from the operating company to holding company,” he added.

For SP group, a quick stake sale is necessary given its immediate liquidity needs and for the group to manage its almost 30,000 crore debt, and protracted negotiations may turn out to be unfavourable for the group.

To be sure, others feel that valuation might not end up being a major bone of contention.

“The valuation being cited by the two groups of Mistry shares is relatively closer; so, negotiating a realistic value for these shares may not lead to conflict,” said a senior lawyer, requesting anonymity.

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First Published:24 Sep 2020, 05:52 AM IST
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