With an eye on debt, Tata Sons set to discuss M&A plans of group companies

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The board of Tata Sons, the holding company of the diversified conglomerate, will discuss the various mergers and acquisitions (MA) plans of the Tata group, especially with regard to the debt that it will be running up, said two people with direct knowledge of the development.

Directors of Tata Sons, which will provide the primary guarantee for any funding that’s needed, have sought more information from the group’s new MA team on two key transactions, they said. This includes the divestment of Tata Teleservices’ consumer mobile business to Bharti Airtel and bids to purchase bankrupt Bhushan Steel and Bhushan Power and Steel under the insolvency resolution process.

The board, aware of the opportunities for acquisitions that could be earning per share accretive in the future, want to be briefed about the debt that will pile up and whether the price is excessive. Tata is expected to assume about Rs 31,000 crore of debt in the Tata Teleservices deal. Tata Steel’s debt could rise to about Rs 90,000 crore if the Bhushan acquisitions go through.

“All the acquisition and merger proposals will be discussed at the board meeting soon,” said one of the two persons cited above. A Tata Sons spokesperson said: “We do not comment on board discussions.” The move comes amid concerns expressed by senior executives of group companies that they haven’t been consulted on MA negotiations. ET had reported March 24 that some Tata veterans were said to be disgruntled about new appointees under Tata Sons chairman N Chandrasekaran being given too free a hand to build their own teams unlike before.

Some executives referred to the ejection of Cyrus Mistry as Tata Sons chairman for, among other reasons, not keeping the Tata Trusts in the loop about certain acquisitions. The philanthropic Tata Trusts, run by Ratan Tata, have a controlling stake in Tata Sons.

“There is concern that why have experienced executives been kept out of such big deals and if Cyrus Mistry was criticised for not keeping the Trusts updated on the Welspun deal, how is the Bhushan Steel issue different,” a top executive told ET. “There is a concern among some top brass about a transactional culture coming in where short-term deals do not keep long-term strategy in mind.”

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Another worry was the sale of Tata Consultancy Services (TCS) stock. “Tata Sons’ exposure to the funding of multiple deals when TCS is the only cash cow for the group has got the top brass worried in the Trusts and the Tata Sons board,” said a top official. Incidentally, Chandrasekaran was TCS CEO until he took over as Tata Sons chairman in February 2017.

In March, Tata Sons sold a marginal 1.5% stake in TCS for Rs 9,000 crore, primarily to improve the leverage ratio of the holding company which has been purchasing stakes from group companies as part of untangling the cross-holdings among them. “TCS sale is hardly a recommended sale since it involves selling high price-earnings stocks to fund lower PE ones,”said the person cited above. “The number of rights issues Tata Sons have participated in recently, delay in sorting out the merger of Tata Teleservices with Airtel and sale of fibre assets are also concerns of the board.”

The Tata Sons board has three directors nominated by Tata Trusts with a veto power, while others represent Tata Sons. “In usual circumstances, the decision usually goes to the board of the operating company, but large deals which change debt ceiling or in case an equity issue is needed, Tata Sons need to give a tacit approval,” a former Tata Sons director told ET.

In the Bhushan bankruptcy process Tata Steel has offered an upfront payment of Rs 34,800 crore to lenders, along with a 12.27% in the debt-laden Bhushan Steel. It has also offered to pay salary arrears of 353 workers of Bhushan Steel and ensure continuation of employment. It has offered to pay Rs 24,500 crore for Bhushan Power and Steel against rival JSW Steel’s Rs 11,000 crore. One concern is over whether Tata Steel has offered too high a price.

The board may raise questions over the debt of Tata Steel rising to around Rs 90,000 crore if it acquires the Bhushan companies, though this will increase capacity, add value-added, higher-margin auto steel to the product range and improve operating profit due to better capacity utilisation. The board may also seek details of the purchase offer by American private equity fund TPG Capital for the optic fibre business of Tata Teleservices.

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