Private equity firms value SP Group stake in Tata Sons at hefty discount

Private equity (PE) funds are valuing the 18.4-per cent stake that Shapoorji Pallonji (SP) Group owns in Tata Sons at a discount ranging between 25 per cent and 40 per cent of its market value. The quantum of discount they want depends on whether they are offering credit lines to the group or seeking to buy their equity in the holding company.
 
PE funds offering credit lines to the group to pay off part of the latter’s loans have valued the shares at a discount of 25-35 per cent of the market value.
 
However, global PE funds looking at buying SP Group’s equity in Tata Sons have valued it at a higher discount — 30-40 per cent of the market value. The move comes close on the heels of the Supreme Court dismissing Cyrus Mistry’s plea and upholding his ouster as executive chairman of Tata Sons. Repor­tedly, the Tatas are also planning to go to court to protect themselves from any pre-emptive sale of Tata Sons shares in case SP Group pledges them.
 
PE players willing to offer credit are asking for two things — a personal guarantee from the SP family, and a pledge of shares in its own group companies.
 
“Since there is no clarity on whether they can pledge their Tata Sons shares, we are happy to provide credit if they give us a personal guarantee, apart from pledging their group company shares. Earlier, they were not willing to give a personal guarant­ee, so our discussions ended. If they could pledge the Tata Sons shares, it would be a different scenario,” says a top executive of a global PE firm, which offers credit to companies.

 
Both Tata Sons and SP Group did not respond to queries till the time of going to press. PE funds looking at only an equity deal are seeking a higher discount on the market value. They also want a clear exit route from a non-listed company after five to eight years.
 
Says a top executive of another PE firm: “I don’t think anything has changed in the past few months in Tata Group. The underlying value of Tata Sons shares comes from a select number of companies like Tata Consultancy Services which have huge weighting. You always have the option of buying these shares directly from the market rather than take on the liabilities of other companies in a holding company — until you are offered a steep discount.” 
 
There are other problems which need to be tackled, such as the exit route for PE or sovereign funds. PE funds say one way out is for the Tatas to set up a special purpose vehicle in a joint venture with a PE or a sovereign fund and buy SP’s shares with a clear exit timeline. That would obviate the need for Tata Sons to be listed. 
 
A few days ago, SP Group received the nod for a one-time restructuring proposal from the KV Kamath Committee. The group’s debt repayment obligation in 2020-21 is Rs 5,320 crore on a standalone basis, and Rs 10,000 crore on a consolidated basis. Its total borrowings have hit Rs 25,000 crore. The company has applied for various reliefs under the restructuring scheme, including a two-year debt moratorium. It has also come up with a plan for asset monetisation, which includes stakes in some of its key companies.