The Valuation Question In The Tata Chemicals-Tata Global Deal

Tata Global Beverages Ltd. will purchase the consumer business of Tata Chemicals Ltd. in exchange for shares issued to the chemical company’s shareholders.

Shareholders will get 114 shares of Tata Global Beverages for every 100 shares held in Tata Chemicals, according to the company’s statement. Since the maker of salt and specialty chemicals has 25.47 crore outstanding shares, the share swap ratio of 1:1.4 means 29.04 crore shares of Tata Global Beverages will be allotted to Tata Chemicals shareholders.

Tata Global Beverages’ shares last closed at Rs 199 apiece. That implies an equity value of Rs 5,779 crore for the consumer division of Tata Chemicals.

HSBC, in a recent report, assigned price-to-earnings multiple of 23 times for Tata Chemicals’ consumer business based on sum-of-the-parts valuation method. At this rate, the equity value of the company’s consumer business works out to Rs 7,867 crore. The brokerage, however, said that it was at a significant discount to its Indian peers.

What that means is the Rs 5,779-crore valuation, based on Wednesday’s closing price, is even lower than HSBC’s discounted value, raising the question if the share-swap deal undervalued Tata Chemicals’ consumer business.

Deutsche Bank, however, views the demerger deal as positive for Tata Chemicals. “Once the consumer business is excluded, the soda ash and specialty chemicals businesses at 7.8 times price-to-earnings estimates for financial year 2019-20 are at attractive valuations,” its research arm said in a note, adding that it sees 30 percent upside to the share price of Tata Chemicals.

Ajoy Misra, the managing director of Tata Global Beverages, doesn’t think the valuation is low. “The right fit for the swap ratio (which) was arrived at by finding out what is the inclined value of both Tata Global Beverages and Tata Chemicals,” Misra said, adding that it would not value the companies based on the last closing price but on the long-term implied value of the business. “The boards of both the companies were satisfied with the value.”

The valuation was agreed upon following a presentation by Ernst & Young and JPMorgan Group.

A higher valuation would imply allotting a higher number of shares of Tata Global Beverages to the shareholders of Tata Chemicals. This would increase the base of outstanding shares, lowering earnings per share for Tata Global Beverages investors.

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