This week's acrimonious separation between the chairman of Tata Group and its majority owners may now be heading for a divorce. Ratan Tata, who returned to head the conglomerate after ousting Cyrus Mistry, is looking for a partner to buy the ex-chairman's stake, Bloomberg News reported Thursday.
Should Mistry agree to sell, how much can he hope to get for his family's 18.4 percent of Tata Sons Ltd.?
Bear in mind that following his dismissal, Mistry raised some very serious allegations about both the holding company and several of its biggest publicly traded units. In hitting back at the board that fired him, Mistry said the group's net worth of $26 billion could be impaired by as much as $18 billion -- shrinking to just $8 billion -- should writedowns be needed at businesses like Tata Steel Ltd.'s European operations; Tata Motors Ltd.'s passenger car business (ex-Jaguar Land Rover, the jewel in the empire's crown); Indian Hotels Co.'s overseas Taj properties; one of Tata Power Ltd.'s plants; and a floundering wireless telecom venture with NTT Docomo Inc.
As a seller, Mistry is unlikely to behave anything like a spurned chairman trying to score debating points. To maximize value, he might say he overestimated the risk of Armageddon. He might even admit the possibility that Ratan Tata's return to a conglomerate he chaired for two decades will reinvigorate the operating companies.
Maybe Tata can't repeat a near sevenfold increase in book value over the period 2004-2012, but if global steel demand stabilizes, there's a fair chance the group's assets could reach a book value of $28 billion after a year. In the base-case scenario, the coffee-to-cars-to-software conglomerate won't be any worse off, and its assets would be worth in 2017 what they are today: $26 billion.
Now suppose that status quo has a likelihood of 50 percent, while the probability of a massive writedown is 20 percent, and that of an improvement is 30 percent. That gives a one-year-forward book value of $23 billion. Considering that General Electric Co. trades at three times its estimated book value for next year, and companies in the more diversified Tata Group sell at 4.8 times, Mistry could perhaps ask for a halfway-house multiple of 3.75 times, valuing his 18.4 percent stake at a little under $16 billion.
Only a patient investor who cares more about growth than current income would be willing to write that check. After all, the dividend received from operating companies yielded just 1.6 percent on Tata Sons' investment last year, according to the Economic Times. An investor who paid a multiple of 3.75 to relieve Mistry of his stake would earn a divided yield of 0.4 percent.
As for Mistry himself, at $16 billion, he would walk away with an annualized 4.5 percent return on the $200 million loan the Tata family took from outsiders 91 years ago. Include past dividends, and he might even have matched or beaten the 9 percent annual return from the U.S. stock market since 1928. That's hardly a divorce to feel unhappy about.
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($26b x 0.5) + ($8b x 0.2) + ($28b x 0.3) = $23b
$23b x 3.75 x 0.184 = $15.9b
That was in 1925. A few years later, that unpaid loan became the Tata Sons equity that Mistry's family acquired for an undisclosed sum.
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