Almost three months after making public Honda's exit from the venture, Hero Honda has disclosed that Hero Investments will buy out Honda's stake at Rs 739. 97 a share. This acquisition price is at a huge 48.7 per cent discount to the current market price of Rs 1,518. At this price, the value of Honda's 26 per cent stake works out to Rs 3,842 crore. In fact, speculation about a low exit price and an increase in royalty to about 8 per cent of sales as compensation had dragged the stock price down in the first two weeks of December 2010.

However, sentiments improved once the official announcement was made in mid-December. The best sweetener was the indication from the management that the company's royalty payments to Honda would be on current lines or even lower beginning January 2011.

Besides, concerns on the product pipeline were put to rest by the fresh licensing agreement that was to be signed between Hero and Honda. The third positive was the fact that the Hero Group itself, would be buying out Honda's entire 26 per cent stake, rather than sharing it with private equity players. This move indicated that Hero had a solid long-term plan in place, and wanted to ensure stability in the management after the exit of the foreign partner. After this buyout, Hero Investments' stake in the company would move up to 43.33 per cent from the current 17.33 per cent.

However, it is expected that Hero Investments would sell stakes to PE firms to raise funds for this buyout.

While the market appears to have anyway factored in a big discount earlier on, it remains to be seen how shareholders react to this announcement. The Hero Honda stock closed about 0.75 per cent lower on Tuesday. The date of acquisition is expected to be around March 22.

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