There are major implications for some group firms which have a cross-holding in Tata Sons
Investors frown at cross-holdings as it leads to locking of capital, which could be used elsewhere
Among the many questions raised in the tussle between the Tata Group and Shapoorji Pallonji (SP) Group is how much Tata Sons Ltd is worth. The SP Group’s version is that it is the sum of the value of holding company’s stake in various listed firms, and then some more to account for some unlisted companies and the Tata brand value. This worked out to ₹9.7 trillion or $132 billion, in their books.
Whether the Tata Group agrees to this valuation is a separate matter, but at the least, some analysts say that Tata Sons should be worth the sum of its value in listed companies, after adjusting for the debt on its books.
“The value of Tata Sons’ holding in listed companies gives a $107 billion valuation," wrote analysts from Jefferies India Pvt. Ltd in a report on 6 October. This is based on closing stock prices on 5 October.
But even working with this lower valuation, there are major implications for some Tata Group firms which have a cross-holding in Tata Sons.
In one case—Tata Chemicals—the value of its 2.5% Tata Sons stake is about ₹20,000 crore, or about 2.5 times its own market cap of around ₹8,000 crore.
Jefferies points out that the value of Tata Sons shares held by group companies as a percentage of their market capitalization is more than 50% for five group firms. These include Tata Power Co. Ltd (75%), The Indian Hotels Co. Ltd (73%), Tata Steel Ltd (55%) and Tata Motors Ltd (54%).
Investors typically frown when their companies have cross-shareholdings. The main quibble is that they lock capital, which could otherwise have been used elsewhere.
Companies such as Tata Steel and Tata Motors are regularly grappling with debt issues, and it would be natural for investors to complain about precious capital being locked away in investments in the promoter group’s shares. “They need to unlock value by selling off their cross-holdings (stake in Tata Sons) to realize the true value," said an analyst, requesting anonymity.
But some worry that instead of realizing the locked value of their shares, some group firms may end up paying a price.
As analysts at Jefferies say, “A potential buyout of SP Group’s holding by the Tatas would entail a large cash outgo. If the burden of funding the same falls on listed companies, it can potentially negatively impact the investor sentiments on listed Tata companies, including TCS."
The burden may come about in different ways—either through a direct sale of TCS shares, for instance, to raise cash or by handing over shares of some group firms to the SP Group as part consideration. This can potentially create a supply overhang on these stocks, and impact valuations.