Tata Sons, the apex holding company of the Tata Group, has offered to buy the 18.3% shareholding of the Shapoorji Pallonji Group. This is the culmination of the serious conflict between the two titans which broke out when Cyrus Mistry of the Shapoorji Pallonji Group, was summarily sacked in 2016 from chairmanship of the Group. Cyrus Mistry was anointed just a couple of years back then.

Shapoorji Pallonjis were the single largest private shareholder in the Tata Group at one point of time. Both being Parsis, the two had implicit faith in each other and Shapporji’s investment in Tata Group 70 years back played a critical part in its development. The Mistry’s fund infusion into Tatas came at a time when the latter badly needed some funding to shore up their steel business.

The immediate trigger for the current parting of ways was prompted by the SP Group’s move to pledge its Tata Sons shares to raise some loans. Shapporji Pallonji Group is mostly in construction and they were facing difficult liquidity situation after the covid spread and series of lock downs in the country. They pointed out the money was needed to pay their labour and defray urgent expenses.

Tatas objected to the move on the ground that if SP Group defaulted on its repayment, the shares might land with undesirable owners who can create considerable problem for the Tatas.

This tacitly at least is an acknowledgement that the Shapoorji Pallonji Group has been a benign shareholder for seventy years without creating too much nuisance.

SP —short for Shapoorji Pallonji— were rich merchants of Bombay and came up to pick up close to 20% of the initial capital when the Tatas were a fledgling steel company, having set up the Tata Iron and Steel company in Jamshedpur.

Fast forward to 2010s when it was becoming increasingly clear that ageing Ratan Tata, then chairman of the group, would be retiring from day to day management functions, a search committee was formed to find out a suitable candidate. The independent committee unanimously chose Cyrus Mistry of the SP Group as the chairman.

However, disillusionment was not long in coming. The ultra conservative Tatas, who had handed over the management to Cyrus Mistry, found his way of functioning in violation of the Tata values. Mistry was seeking to restructure the Group and also take new initiatives which were not to the liking of Ratan Tata, who remained as the chairman Emeritus.

SP Group on the other hand felt Ratan Tata never left the handling of the affairs in the hands of the newcomer and kept on giving instructions and weighing in to stall many of the proposals of the new management under Cyrus Mistry. In the end, Mistry was given an ignoble exit, without even proper prior intimation.

Soon after the unceremonious sacking of Cyrus Mistry, the two families, Mistrys and Tata, plunged into war of words. In a statement issued by the SP Group, it has maintained that a decision to part company was being taken with a heavy heart.

The standoff was complete in the last four years until Wednesday, when the two sides agreed to squaring off the deal: Tatas will buy the SP shareholding.

However, that is easier said than done. The amounts involved are humongous. On rough and ready estimates, it is believed the Tatas will have to shell out approximately Rs 2 lakh crore for purchase of Shapoorji shares. That of course is only a rough guess.

Once the transaction is agreed to, the two groups will have to come to an acceptable value for the shares. Valuations of the 18.3% SP shareholding could be immensely complex. Since the two sides have agreed to the transaction, it could be expected that both would have done some initial private calculations of the value. However, if their estimates vary widely, then the process of negotiations and arriving at an agreed value could be quarrelsome.

For Tata Sons is the apex holding company for some seventy group companies, including such highly valuable ones like Tata Consultancy Services. TCS alone is estimated to be worth some Rs 9 to Rs 10 lakh crore. Then there are a number of unlisted companies in the group whose share value is not explicitly known and would have to be evaluated.

The extremely thorny issue could be the Tata brand value. Tatas had introduced the concept of charging its group companies fees for using the Tata name as a brand. The fees for brand ownership went to Tata sons. Now that brand value has also to be factored in in any valuation of the SP holding.

Incidentally, Tatas had claimed recently the Tata brand value to be worth $20 billion.

Once the shares held by SP Group is properly evaluated, possibly by some international financial consultant or accounting company, and then vetted by similar agencies appointed by the two groups, the purchase would have to be funded.

Tata Sons will have put together such an enormous amount of money through some financial arrangement. It appears Tata Sons, on its own, does not have the kind of funds required for concluding the deal. However, Tata Sons can raise the funds from some private equity funds or banks.

There would of course be many other options for raising the funds for the Tatas, but the most interesting part of the deal would be how the shareholding is valued which could be agreeable to both. (IPA Service)