In a non-cash settlement, the assets and liabilities of Tata Sons would have to be separated in proportion to SP’s 18.37% stake. The assets would cover Tata Sons’s holding in listed and unlisted firms as well as the Tata brand value (which is worth $20 billion, according to Brand Finance’s 2020 ranking). While liabilities would comprise the investment firm’s debt, which was Rs 31,319 crore in FY20.
As Tata Sons owns 72% in TCS, SP’s proportionate holding in the software behemoth is 13.2%. Likewise, Tata Sons holds 29% in Tata Consumer and, therefore, SP’s proportionate stake in the owner of Tetley Tea is 5%.
“Tata Sons, after it became a private limited company, has all the traits of a partnership. With a partner (SP) wanting separation, Tata Sons could look at splitting its assets and liabilities vertically, in proportion to the partner’s share in the company,” said Anil Singhvi, chairman of ICAN Investment Advisors.
Tata Sons would then have to offer SP shares of listed Tata companies to the extent of its proportionate stake in the investment firm’s assets and liabilities, the experts added. So it could offer a certain stake in TCS, Tata Consumer and in other listed Tata entities (after adjusting for the value of Tata Sons’ holding in unlisted companies, Tata brand value and the investment firm’s debt). Instead of doing multiple transactions spread across listed Tata entities, it could do a single deal in TCS, they opined. The stock settlement, which would provide SP an exit from Tata Sons, would also ensure that the investment firm continues to retain majority control in TCS.
“Settlement combinations could also be worked out. Tata Sons could pay some part in cash and the rest in stock of listed Tata entities. Like SP’s proportionate share in the Tata brand value could be paid in cash,” added Singhvi. “A stock deal also ensures there is no disruption for Tata Sons, which holds a majority stake in its operating entities.”
Valuation differences (SP pegged its stake at Rs 1.78 lakh crore, while Tata Sons differed, citing applicability of illiquidity discounts), balance sheet impacts (even at a depressed valuation, Tata Sons will find it challenging to fork out such a sum amid Covid ravaging global economy), staggered cash payouts, and restrictive share transfer clauses (foreign investors find this less appealing in Tata Sons) could be avoided in a non-cash deal, the people said.
An October 6 Jefferies report said a potential buyout of SP by the Tatas would entail a large cash outgo. If the burden of funding the same falls on listed Tata companies, it could negatively impact investor sentiments on these companies including TCS.