PE firms, sovereign funds want discount, exit route for Mistry stake

A number of private equity players and sovereign funds have expressed interest in buying the 18.4 per cent stake of the Shapoorji Pallonji group in Tata Sons as the top management in Bombay House weighed the options before it. This comes a day after the SP group, owned by the Mistry family, told the Supreme Court that it would exit Tata Sons, provided an early, fair and equitable solution was reached, in a move that could end years of feud between the two sides.

Mistrys—the second largest shareholder in Tatas’ holding company--set a valuation of Rs 1.8 trillion for its stake.        

While they are bullish about the opportunity, many of the PEs and sovereign funds said the shares should be on offer at a discount on the market value. Also, they would want an exit route.  

According to a senior executive of a top global private equity fund, the shares should be available at 20 to 40 per cent discount.

The executive pointed out that PEs have the option of buying directly in the three listed companies which provide for bulk of Tata Sons value—Tata Consultancy Services (TCS), Tata Motors and Tata Steel. “Investing in a holding company is like putting money in a mutual fund. Since the bulk of the value of the holding company is in TCS (besides Tata Steel and Tata Motors), we are taking the liability of the rest of the companies.’’ The only reason to do so would be to get a steep discount, he said while adding that PEs have the cash to do the deal in one go.

As Tata Sons is not a listed entity, PE funds would prefer an exit in four to eight years as is the case in big deals. However, sovereign funds could hold on for a much longer time and are far more flexible.

A sovereign fund will have the option to set up a special purpose vehicle (SPV) for the purpose with the Tatas. Amit Tandon of Institutional Investor Advisory Services said, “You can always create an SPV  with a sovereign fund and have that buy shares. The fund can have an exit in the future.”

While in such a scenario, there’s no need for Tata Sons to go public, it will have to get into an agreement with the sovereign fund on the timeline for an exit along with other details.

The discount on the market value demanded by a private equity player would be higher than what a sovereign fund may ask, according to experts.  

In the recent past, no holding firm like Tata Sons has been made to go public for the purpose of providing an exit route to PE funds. But, that may not be the only way out. According to an industry source, PE players can offer debt, provided the shares of Tata Sons are pledged to them. “We are willing to offer them loan on pledged Tata Sons shares, provided we have a lien on selling the proportionate value of TCS holdings based on our pledged shares in case of a default,” the source said.