Hero group to buy out Honda's 26% stake for Rs 3,842 crore

The Munjals-led Hero group will buy out Japanese co-promoter Honda Motor's 26 per cent stake in Hero Honda for Rs 3,842 crore. This is less than half the current market value (Rs 7,882 crore) of Honda's 5.19-crore shares. The date of acquisition is “on or about March 22, 2011”.

Hero Honda's shares on the BSE fell 0.77 per cent to Rs 1,518.15 on Tuesday.

After months of speculation, the Hero group said in an official statement that the purchase would be made through its investment arm, Hero Investments Pvt Ltd (HIPL), at Rs 739.97 a share and would be initially financed through debt.

Asked why Honda would be willing to sell its stake in the successful joint venture for a heavy discount, a sector analyst said, “Though the recurring royalty payments may not increase, going forward, as has been previously indicated, there may be a high one-time model fee that Hero may have to pay Honda.”

Mr Mritunjay Kapur, Country MD, Protiviti Consulting, added, “I think Honda's biggest gain could be the removal of all clauses from the non-compete agreement between its fully-owned subsidiary and Hero Honda. There could be other things as well, though in large block deals, discounts are common.”

“Hero and Honda are amicably parting ways after this deal is completed and will be competitors henceforth in the two-wheeler market,” said another analyst from a leading fund house.

PE FUNDING

To retire the debt raised for the acquisition, HIPL would look for investments from private equity (PE) firms Bain Capital and Government of Singapore Investment Corp, with whom it has already signed agreements. The final approval for this rests with the Cabinet Committee on Economic Affairs (CCEA).

“The Hero Group has also signed definitive agreements with private equity firms BC India Pvt Investors II, an affiliate of Bain Capital LLC, and Lathe Investment Pvt Ltd, a wholly owned subsidiary of Government of Singapore Investment Corporation (Ventures) Pvt Ltd, in terms of which the P-E firms will invest in HIPL to raise funds for this acquisition,” said the statement.

Hero's application to raise Rs 4,500 crore from foreign investors has already been recommended by the Foreign Investment Promotion Board to the CCEA. “Further details will be shared after receiving the necessary approval from the CCEA. The funds received as investment made in the holding company by the PE firms will be used to retire a significant portion of the debt that has been raised by HIPL recently for financing the acquisition,” it said.

In December last year, when the Hero group formally announced the end of its partnership with Honda, the two companies also signed a MoU for a new licensing agreement to give Hero Honda access to existing and new Honda technology.

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