LONDON--(BUSINESS WIRE)--Knight Assets & Co., who advises funds holding a significant portion of Tata Motors Limited’s (“TTM”) ‘A’ shares and Ordinary shares, sent a letter to the Company on June 10, 2014 and delivered a presentation to the Company’s management team on Friday, June 20, 2014. These materials lay out a comprehensive plan aimed towards materially enhancing the value for all shareholders and eliminating the discrepancy within TTM’s capital structure, specifically the mispricing of the ‘A’ shares.
Akshay Naheta, Managing Partner of Knight Assets & Co. stated, “The Tata Group has successfully transformed TTM, and its automotive brands Jaguar and Land Rover, into a premium global auto manufacturer over the past 5 years and has set the Company on a solid path of growth and product innovation for the future. However, we firmly believe that both the Ordinary and ‘A’ shares are materially undervalued, and we estimate are in actuality worth at least INR 700 per share, or approximately $58 for the Ordinary share ADRs in the U.S. (Appendix 1).
“We believe that the solutions we have presented to the Company, most notably the NYSE listing of an ADR for the ‘A’ shares, can correct this irrational discrepancy in valuation and will benefit all long-term shareholders – including first and foremost Tata Group itself. We have also performed extensive due diligence to confirm that our plan is actionable in the near-term, including working with U.S. Legal, India Legal, Regulatory (SEC and SEBI), Listing Rules (NYSE and India), Proxy firms, obtaining a validation on our solution from a global investment bank, and have discussed it with other large shareholders of the Company. It is Knight Asset & Co.’s desire to continue to work collaboratively with management and we are willing and able to assist them in whatever way we can towards implementing the core elements of this plan in a timely manner.”
Key Elements of the Proposed Solutions
Our proposal is in the interest of all stakeholders and would entail TTM undertaking certain corporate actions that would:
1. Eliminate the discrepancy in the capital structure;
2. Materially increase the value of the Company for all shareholders; and
3. Significantly diversify the shareholder base of the Company.
Our proposal is consistent with the best practice corporate actions of other credible companies from around the world – such as Google, Fiat, Berkshire Hathaway and Infosys. This, along with our global investment experience, informs what we believe is a comprehensive solution for perpetually eliminating this disparity and potentially providing significant valuation upside to all (Ordinary and ‘A’) shareholders.
The core aspect of our proposal would allow an immediate listing of the ‘A’ shares on the New York Stock Exchange (“NYSE”), and then subsequently would allow the Company to increase the float within both the Ordinary and the ‘A’ share ADR listings.
We firmly believe that the ‘A’ shares should be trading at parity to the Ordinary shares (Appendix 2 and 3), and that it is in the best interest of the Company and the Tata Group to actively seek to eliminate this disparity. Most importantly, actions to resolve this situation by the Company, and by extension the Tata Group, would be seen as a shareholder friendly gesture and would only serve to enhance the group’s reputation with global investors.
The Company originally issued this instrument in order to raise equity capital without diluting the voting rights of the Tata Group. Diluting the economic rights of all shareholders at a large discount to fair value is an extremely unattractive and shareholder unfriendly proposition. Making this instrument relevant today creates future capital raising flexibility for the Company, along with an investor base that is more knowledgeable and accepting of such an equity security.
Institutional and retail investors in India have been unexposed to dual class share structures and hence there is a significant disparity between the two share classes; whereas U.S. investors have been exposed to such dual class share structures for decades.
For all dual class share structures in liquid international markets the reputation of the controlling shareholder, along with the attractiveness of the fundamentals of the underlying company, tend to dictate the traded premium/discount for the reduced voting right shares. Hence, comparing the discount of TTM to that of other Indian companies with such a share capital structure is irrational. We would highlight that:
1. The Tata Group’s reputation is second to none globally and TTM has successfully transformed itself into a world-class premium auto manufacturer with an attractive growth profile; and
2. Based on analyst estimates, the capacity at Jaguar Land Rover (JLR) is expected to increase by 50% over the next 2 years and JLR will have the lowest model age, of sub 3.5 years, when compared to its global luxury peers (Audi, BMW and Mercedes).
For U.S. investors, buying the ‘A’ shares at a discount to the Ordinary shares would be an attractive proposition due to the higher dividend rights. Furthermore, our dialogue with banking intermediaries indicates that there would be considerable demand for TTM’s ‘A’ share ADRs at a 5% to 7% discount to where the Ordinary share ADRs currently trade. Post the listing being effective on the NYSE, the Company can appoint an investment bank(s) to conduct a reverse tender to significantly increase the float within the ADR listing (akin to Infosys in 2006).
From a regulatory perspective, we have specifically discussed the listing of TTM’s ‘A’ shares with the NYSE and the SEC and have received affirmative responses.
The NYSE listing would have further added benefits for the Company:
1. The Company already has an ADR listed on the NYSE for the Ordinary shares hence any additional filings and regulatory procedures would be constrained to a minimum; and
2. The U.S. capital markets are the most liquid and dynamic markets in the world. As the Company’s earnings and fundamental value are increasingly derived from outside India, it would be a long-term benefit to further diversify the shareholder base internationally.
We are highly supportive of the management team and believe that the Company is poised to continue growing and improving on its stellar performance. We are also confident that the Company has an extremely shareholder friendly stance and will implement any logical solution that eliminates this irrational discrepancy and creates shareholder value.
It is Knight Asset & Co.’s desire to continue to work collaboratively with management to put into action the proposals outlined in the letter and presentation, which the firm believes will benefit all long-term shareholders of TTM. Knight Assets & Co. and the Company have met and discussed its solutions. The meetings included constructive dialogue, which reflected the Company’s appreciation for the concerns about the market valuation of ‘A’ shares, the work that has been done to identify solutions to enhance shareholder value and a desire to consider the proposal. Knight Assets & Co. hopes to continue this collaborative effort with the Company and is available to assist the Company in beginning the process to implement the core elements of the plan of action in the near-term.
For more information, including a presentation, the press release with full appendices and additional resources, please visit http://www.tatajlr.com/.
About Knight Assets & Co.
Knight Assets & Co. LLP (“Knight Assets & Co.”) is a U.K. FCA regulated investment advisor that focuses on arbitrage and value-driven investment strategies. We primarily advise institutional investors – corporations, endowments, family offices, foundations and pension funds.
We invest in companies and markets that are experiencing significant change. Our investment philosophy is to deploy capital where it is needed most, predominantly in situations that are misunderstood by the markets due to complexity. And, we have an intense focus on capital preservation.
Our general approach to investing often conflicts with consensus thinking. We have the capability to analyze an intricate group of events, understand the magnitude of those issues, and determine whether a successful resolution is achievable.
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