Tata can buy out Mistrys from Tata Sons, but it’s a $10 billion solution

In response to Cyrus Mistry’s allegations against the Tatas for removing him from the chairmanship of Tata Sons, the Tata Group rubbished his allegations and said there was a growing “trust deficit” with the trustees of the charities which own a majority of the company’s shares. The Tata statement emphasised that Mistry “had overwhelmingly lost the confidence of the board.” Contrary to what one may assume, this “trust deficit” is key to understanding why the Tatas were willing to risk the public washing of dirty linen in order to get Mistry out. A Bloomberg report says that the Tatas have been sounding out sovereign wealth funds and long-term investors to buy out the Mistry stake in Tata Sons (around 18.4 percent) to end the relationship that has been fairly close and cordial in the past. [caption id=“attachment_3077700” align=“alignleft” width=“380”]  Ratan Tata in a file picture. Reuters[/caption] At the core of the mistrust are two factors. First, the Mistry family and trusts own nearly a fifth of Tata Sons shares, and indirectly a similar share in Tata Consultancy Services (TCS), which is the biggest cash generator for Tata Sons. TCS delivered over 95 percent of the latter’s dividend income in 2014-15, and possibly something similar last year. Secondly, the Tatas probably made a mistake in getting Mistry to run the group. It could have hired a professional CEO who would have been accountable to the Tata trusts and shareholders; but by inducting a co-shareholder and a billionaire businessman in his own right, the Tatas essentially brought in a man who would not have played second fiddle. Entrepreneurs do not play stand-in roles in the companies they are called upon to manage. They think of themselves as near owners, even if they are not actual owners. This, the induction of a co-shareholder with his own mind, and his direct equity interest in Tata Sons, probably lies at the root of the “trust deficit” that the Tatas talked about. The only way out of this deficit is to buy the Mistrys out in Tata Sons, but that is a tall order. Reason: it will involve a huge cash payout which the group simply does not have right now. The Mistrys’ share of Tata Sons, assuming it entitles them to a proportionate share of TCS (Tata Sons holds around 74 percent in TCS), would work out to Rs 64,000 crore purely going by TCS’s current market valuation. Add the valuations of the shares of other Tata companies held by Tata Sons, and the actual costs could rise well above Rs 70,000 crore. That is $10 billion and more. This kind of money cannot be raised by the Tata group right now, when it is steeped in debt and has had a run of poor profitability in its core companies, from Tata Steel to Tata Power. This is where the sovereign wealth funds or long-term investors may be useful, but that too will not be easy because investors will want to see their own investments grow. This can’t happen if TCS dividends are being routed to help other Tata companies out of a debt trap or to invest in expansion. Moreover, long-term investors may also seek the kind of divestitures and asset sales that Mistry may have called for, earning “distrust” in the bargain. The Tatas will not find it easy to get the Mistrys out of their hair. The bill will be in excess of $10 billion – at the very least. But it is also the only way to get the right to run Tata Sons any which way they want. Freedom from the Mistrys comes at a high price. Read here a moneycontrol.com story on why Mistry’s ouster from group companies will be a long-drawn affair.