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Hero Group To Buy 26% Honda Stake In JV

16 December, 2010

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What The Split Means:

–Fresh licensing agreement with Honda for new models

–All existing products to continue

–Freedom to go global and export to new markets

–Independence to set up own R&D and new product development capabilities

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The 26-year-old joint venture (Hero Honda Motors Ltd) between Hero Group and Japan’s Honda Motor Company has come to an end. The Indian auto major has agreed to buy the 26% stake held by Honda in the JV in a restructuring of their equity positions.

Hero Honda Motors Ltd also signed a new licensing agreement with Honda Motor that will enable it to develop its own R&D capability and foray into global markets.

The move will pave the way for Hero Honda to develop its own R&D capabilities and exploit global export opportunities while Honda continues to provide new models, the company said in its filing to the stock exchanges.

The Hero Honda brand name will change over time and there will be no change in ground operations in the near future, it said.

Terming this as a new beginning, Hero Group chairman Brij Mohanlal Munjal said, “We set up Hero Honda more than 25 years ago with a vision of providing easy mobility to millions of people”

Honda managing director Fumihiko Ike said, in a statement, “our joint venture agreement will be dissolved but our positive relationship will continue. Honda will grant necessary license to enable continued production and sales of new products as well as a license for new products.”

Though Hero Group declined to reveal the price at which it is acquiring Honda Motors’ stake, various reports have pegged the deal anywhere between $1.2 billion and $1.5 billion. Honda Motors expects the stake sale in a phased manner starting from January of next year.

The price paid by Hero group is expected to pay a discount to the current market value which stands at Rs 8,718 crore or $1.9 billion.

While Hero group did not elaborate on how it will fund the deal except saying ‘through debt’, a private equity participation has been doing rounds since last few months. Reports have said at least three PE majors have been shortlisted to invest in a special purpose vehicle which will buy Honda Motors stake.

“Indian partners and the international partners have started to believe that the market size has reached a level where both the partners can play independently,” said Jagannadham Thunuguntla, head of research at SMC Global Securities told Reuters.

Hero Honda has been prospecting three locations in Tamil Nadu, Karnataka and Gujarat for setting up an export oriented plant, VCCircle reported in September. The company, which is the largest two-wheeler maker in India and in the world, is looking at direct exports to markets such as Indonesia and Philippines as well as Africa.

Honda Motors is also now expected to focus wholly owned unit Honda Motorcycle & Scooter India (HMSI), set up in 1999 after FDI was opened up in now world’s second-largest market for two-wheelers. HMSI said it plans to invest $110 million for a new plant in Rajasthan which will

have an annual capacity of 600,000 scooters and motorcycles that will take its total capacity to 2.2 million.

The share price of Hero Honda Motors also slipped significantly earlier this week on reports that royalty payment will go up after the new deal. But the Hero Group clarified that royalty will remain the same and even fall going ahead. “The royalty rate will remain in line with the current levels, or going forward they will be even lower,” Hero Honda Chief Executive Pawan Munjal to Reuters.

But the share price of Hero Honda closed up by  3.57% today at Rs 1,679.10 today. The company had a market capitalisation of Rs 33,531.63 crore at this share price.

The deal comes when the competition in the domestic two-wheeler market is heating up. Besides new players like BMW and Mahindra & Mahindra entering the space, it will also face increased competition from Honda Motors. Key rival Bajaj Auto has also been eyeing Hero Honda’s key

segments by launching new products. Hero Honda’s market share in the 75-125cc motorcycle category has been slipping by falling to to 69% in the April-August period as compared to 82% in the same period last fiscal.

Besides Bajaj, Honda Motorcycle & Scooter India has released bikes like Unicorn and Shine in the Indian market.


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Hero Group To Buy 26% Honda Stake In JV

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