Clean­ing Up Crossh­old­ings

The Tata Group’s move to sep­a­rate Tata Chem­i­cals and Tata Global Bev­er­ages is a big step to­wards a sim­pler group struc­ture.

Business Today - - CONTENTS - BY NEVIN JOHN @nev­injl

Move to sep­a­rate Tata Chem and Tata Global Bev­er­ages: Tata Group’s big step to­wards a sim­pler struc­ture

Tata Sons’ move to dis­en­tan­gle crossh­old­ings across group com­pa­nies and con­sol­i­date its own­er­ship is gath­er­ing steam. It has an­nounced it will buy Tata Chem­i­cals’ 43.1 mil­lion shares - a 6.84 per cent stake - in Tata Global Bev­er­ages and con­versely, Tata Global Bev­er­ages’ 11.1 mil­lion shares – 4.39 per cent stake – in Tata Chem­i­cals, thereby com­plet­ing separat­ing the two com­pa­nies. The dual ac­qui­si­tion is es­ti­mated to cost `1,458 crore. It is the Tata Group’s sec­ond such move - in June, Tata Sons had bought out Tata Steel’s `3,800 crore stake in Tata Mo­tors.

But Tata Sons Chair­man N. Chan­drasekaran still has a long way to go be­fore the sort­ing out is com­plete. Tata group com­pa­nies have 28 ma­jor crossh­old­ings — the listed com­pa­nies hold­ing stake in the top 10 listed firms by mar­ket cap­i­tal­i­sa­tion — with an ag­gre­gate val­u­a­tion of `8,600 crore. If ever the op­er­a­tion is com­pleted, the biggest gainer will be Tata In­vest­ment Cor­po­ra­tion ( TIC), the group’s eq­uity in­vest­ment arm, which mostly in­vests in Tata Group com­pa­nies but holds stakes un­der the pro­moter cat­e­gory. TIC is ex­pected to gain `4,200 crore through its stakes in top 10 Tata group com­pa­nies by mar­ket cap­i­tal­i­sa­tion

An­a­lysts en­dorse the drive be­gun by Chan­drasekaran. “The hold­ing com­pany should own stake di­rectly in group com­pa­nies for the sake of trans­parency,” says Arun Ke­jri­wal, Di­rec­tor at in­vest­ment ad­vi­sory firm KRIS.

If group com­pa­nies hold stakes in one an­other, the in­vest­ment will re­main stuck for a long time and can­not be used to grow the core busi­ness. In­vestors are equally pleased. “Disen­tan­gling helps com­pa­nies un- lock a lot of value and more im­por­tantly al­lows in­vestors to choose where they want to in­vest,” says one of them, pre­fer­ring anonymity.

Why did the Tata Group re­sort to such a con­vo­luted own­er­ship pat­tern? “The pur­pose was to keep pro­moter hold­ing at about 25-30 per cent to thwart any preda­tory takeover moves, which were a global scare in the 1990s and mid 2000s,” says a Mumbai banker, who too prefers not to be named. “It would have been a huge fi­nan­cial bur­den for Tata Sons to have di­rectly bought shares in all the group com­pa­nies. So the Tatas de­vised the crossh­old­ing mech­a­nism.”

Dur­ing the half-cen­tury that J.R.D. Tata was Chair­man, the Tata Group fo­cused on cre­at­ing value but did not bother too much about ring-fenc­ing the com­pa­nies with a rea­son­ably sub­stan­tial hold­ing. But Ratan Tata, tak­ing over in 1991, un­der­stood its im­por­tance. He in­creased pro­moter stake in Tata Steel from 6 per cent when he took over to 31 per cent.

Tata Sons will have to meet the cost of di­lut­ing the crossh­old­ings, us­ing the div­i­dend rev­enue it earns from group com­pa­nies. But the sep­a­ra­tion will also bring div­i­dends from the group com­pa­nies di­rectly to Tata Sons. The div­i­dends are the ma­jor source of in­come for the ac­tiv­i­ties of the Tata Trusts, which own over 80 per cent stake in Tata Sons.

Other large crossh­old­ings Chan­drasekaran may clean up soon in­clude Tata Power’s ` 900 crore worth stake in Tata Com­mu­ni­ca­tions, and Tata Chem­i­cals’ `870 crore stake in Ti­tan. The re­lease of in­vest­ment will also help Tata com­pa­nies re­duce their col­lec­tive $25 mil­lion debt. ~

TIC’s stake in ma­jor Tata Group com­pa­nies is val­ued at ` 4,200 crore at the present mar­ket val­u­a­tion

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