Splitsville for Hero-Honda

PreviewHero Honda vs HondaIt’s finally splitsville for Hero Honda, one of corporate India’s oldest and most successful joint ventures , with the two founding partners—India’s Munjal family and Japan’s Honda Motor Corp—agreeing to part ways and terminate the 26-year-old relationship due to unresolved differences and ambitious independent plans.
Sources in the know said most of the terms of the deal, which will see Honda selling its 26% stake to the Munjal family, have been finalized and the matter will now be taken up by Hero Honda’s board on Thursday. Top officials of Honda are arriving here to attend the board meeting , a source said.

The sources added that the Japanese auto major will exit the JV through a series of offmarket transactions by giving the Munjal family—that currently holds 26% stake in the company—an additional 26%. Honda, which also has an independent fully-owned twowheeler subsidiary—Honda Motorcycle and Scooter India (HMSI)—will exit Hero Honda at a discount and get over $1 billion for its stake. The discount will be between 30% and 50% to the current value of Honda’s stake as per the price of the stock after the market closed on Wednesday.

The Munjal family plans to compensate Honda through high royalty payouts, which could double to nearly 6% of net sales. However, key financial institutions have objected to this move, saying that the deal could favour the Munjals but be detrimental to other shareholders.

Spokespersons for Hero Honda and the Munjal family refused to comment on the development .

Sources said as per the arrangement, it will be a two-leg deal. In the first part, the Munjal family, led by Brijmohan Lal Munjal group, will form an overseas-incorporated special purpose vehicle (SPV) to buy out Honda’s entire stake, which will be backed by bridge loans. This SPV would eventually be thrown open for private equity participation and those in the fray include Warburg Pincus, Kohlberg Kravis & Roberts (KKR), TPG, BAIN Capital and Carlyle.

“The PEs will take between 50-60 % stakes in this entity, giving them just under 15% stake in the main company Hero Honda, which would soon sport a new name,” the sources said.

Hero Honda, credited with putting the Indian middleclass on wheels, defied its humble beginnings to quickly emerge as the world’s biggest two-wheeler maker, also ending the stronghold of Bajaj scooters in the country.

Tech, spares major irritants
Hero Honda’s lowcost and highly-fuel efficient bikes (remember the classic ‘Fill it, Shut it, Forget it’ campaign ) quickly emerged as the most-popular and convenient mode of transport, catapulting the company into the global league of two-wheeler biggies.

However, it was the rising differences between the two partners that gradually emerged as an irritant. Differences had been brewing for the last many years over a variety of issues, ranging from Honda’s reluctance to fully and freely share technology with Hero (despite a 10-year technology tie-up that expires in 2014) as well as Indian partner’s uneasiness over high royalty payouts to the Japanese company. Another major irritant for Honda was the refusal of Hero Honda (mainly managed by the Munjal family) to merge the company’s spare parts business with Honda’s new fully-owned subsidiary Honda Motors India (HMI).

Sources said a large number of people from the Munjal clan are also suppliers to Hero Honda, giving undue advantage and benefit to the Indian promoter. But to the discomfiture of the Munjals, Honda wanted a more competitive approach to component procurement that may have seen the end of many of these suppliers.

“The differences became too big to allow a harmonious existence,” the sources said. Simultaneously, Honda’s ambitious plans for its two-wheeler subsidiary HMSI also gave the confidence to the company to go it alone. HMSI has singlehandedly revived the scooter market in India and has been gradually gaining ground in motorcycles as well. A bullish Honda wanted a solo say in the running of its business, and HMSI’s success gave it the confidence to go for a split.

HMSI has seen sales growing 42% in April-November this fiscal and it is setting up a second plant-—with a peak capacity of 1.2 million units—to boost operations. Its plant at Manesar has a capacity of 1.6 million units. Honda is expected to launch a slew of new models, including lowpriced bikes to challenge Hero Honda and other competitors . The exit of Honda has, however, beaten the Hero Honda scrip as investors feel that it may not have the wherewithal to independently provide technology support.