Munjal family & Honda Motor to discuss Hero Honda split today

ET Bureau Dec 16, 2010, 02.34am IST

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Warburg Pincus| Munjal family| Hero Honda Motors Ltd.| Bain Capital MUMBAI | NEW DELHI: The partnership between the Munjal family and Japanese firm Honda Motor, signed in the last year that Indira Gandhi was prime minister, is close to an end as the board of the joint venture company Hero Honda will meet on Thursday to finalise the terms of the disengagement. The meeting will be held at New Delhi in the afternoon and a formal announcement is likely to made later in the day, said two top executives close to the Hero group. The board will mainly discuss the first phase of the deal in which the Munjal family will buy Honda Motor's 26% stake for around $1 billion, or a little less than half the current value of the stake in the stock market.
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At the last traded price of Rs 1,621 per share, the value of Honda Motor's 26% stake is Rs 8,418 crore, or $1.85 billion. The Munjals too own 26% in the company. For Honda, the loss of valuation will be compensated by the higher royalty and direct access to the Indian two-wheeler market, the second largest in the world after China. Honda will continue transferring technology till 2014 for which its former Indian arm is expected to pay 4-5% of annual sales as royalty till 2012. This could then go up to 8%, according to auto industry sources. Hero Honda had not sent out a communication on the board meeting at the time of going to press. Emails sent to Hero Honda remained unanswered. ET NOW, this paper's business channel, first reported on August 31 that the 26-year-old partnership was ending. The first phase will see the Munjals acquiring the foreign partner's stake through a special purpose vehicle (SPV) by raising a short-term or bridge loan. Multinational banks such as Bank of America and NBFCs such as mortgage lender HDFC and L&T Finance, an arm of the engineering company, are in the fray to offer loans. Subsequently, the Indian promoters will divest 60-70% in the SPV to a group of private equity firms to pay back the loan. Bain, Warburg favourites Bain Capital and Warburg Pincus have emerged as the front-runners for this leg of the deal, according to executives in the PE industry. The PE firms are likely to offer 10-12% premium over the sale price, which will give them a stake in the world's largest two-wheeler company at a discount to the market price.

New Delhi-based law firm J Sagar Associates is readying the paperwork for the two-layered transaction, said a lawyer familiar with the transaction. The Japanese partner has agreed on the price and has told Munjals that they can structure the deal to make it tax-efficient and legally compliant in India. The Hero Honda stock slipped 5.4% to Rs 1,621 on the BSE on Wednesday, down 18% over its recent high of Rs 1,973 recorded on November 30 as investors turned cautious at the prospect of Honda's imminent exit. "The challenge for Hero Honda is to develop its own R&D facility which will require a large amount of investment," said Piyush Parag, analyst, Almondz Global Securities. Besides, there are concerns that the company may have to pay higher royalty on the three new variants likely to be launched in future.
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"Competitive pressure is also building up with Bajaj Auto gradually eating into the market share of Hero Honda. This will make it difficult for the latter to cope with competition without its JV partner." Post transaction, the Munjals will emerge as the largest shareholder in Hero Honda with a combined direct and indirect holding of 34-36% and the PE funds will own an indirect stake of 1618%. Since the share sale is between two co-promoters of the company, the deal is unlikely to trigger the takeover code. The stake sale will enable Honda to strike out on its own. Honda's immediate priority will be to expand its 100%-owned two-wheeler subsidiary Honda Motorcycle and Scooter India (HMSI) and enter the aggressively-priced entry-level motorcycle segment. Currently, it is the fourth-largest player in the two-wheeler market with a 14% share though in case of scooters, it is the largest player with a 45% market share. It accounts for only 8% of India's much larger motorcycle market. Honda plans to build a new factory in Andhra Pradesh for its two-wheeler business, while speeding up its development of sales and distribution outlets.

http://articles.economictimes.indiatimes.com/2010-12-16/news/27622928_1_munjalfamily-hero-honda-indian-promoters