Munjals to hold over 52%; mum on participation of PE firms.
After over a year of speculation and hectic negotiations, the Munjals today announced the termination of its 26-year-old joint venture (JV) with Japanese auto major Honda Motor Corporation in the world’s largest two-wheeler company, Hero Honda.
In accordance with a memorandum of understanding (MoU) signed between the two companies today, the Munjals-promoted Hero Group will buy out Honda’s entire 26 per cent stake in Hero Honda. With this, the Munjal family will control over 52 per cent stake in the company.
The transaction, with a market value of nearly $2 billion (Rs 9,100 crore), will take place in a phased manner and is expected to be completed next year. Hero Honda declined to specify the price at which the shares are changing hands, but said it would raise debt to buy them. A definitive agreement is expected to be signed in a few weeks.(Click for graph)
“This is the most important announcement I have made in the last 25 years. The board has approved an MoU today; Hero Group would buy out Honda’s stake in the company,” said Hero Honda Managing Director & CEO Pawan Munjal.
Since the deal is between two promoters, the Munjals do not have to make an open offer. However, they do need to seek an exemption from markets regulator Securities & Exchange Board of India.
Hero Honda will continue to produce and sell its existing range of motorcycles. It can also use the Honda brand name on new models until 2014. However, Munjal said that the name of the company would be changed in “due course”.
On the crucial issue of research & development, on which the company is dependent on Honda, Munjal said: “Once the transaction is completed, we would be free to develop our own R&D capability. We can also source technology globally. “
Technology from Honda will still flow for a while. The Munjals today signed a new licensing agreement with the Japanese giant, replacing an earlier agreement set to expire in 2014. Under this agreement, Honda will provide the Hero group new models, but the company did not specify how long this arrangement is valid.
Fumihiko Ike, managing director & COO of regional operations (Asia & Oceania), Honda Motor, said: “In order to assure service to customers, Honda will grant the necessary licence to enable continued production and sales of current products, as well as licences for new products.”
Giving Honda’s reason for the pullout, Ike added: “Over the last 26 years, the market and the vision of both the companies have changed. We would like to focus on our own business in the country.” Honda’s wholly-owned domestic subsidiary is Honda Motorcycle & Scooter India (HMSI).
Munjal made it clear that the new product lines would be provided by Honda at the existing royalty rate, ending speculation that the Japanese automaker might charge more for technology from now on. “Starting January 2011, our royalty payouts will actually decline, because we will be paying only for three new models,” added Munjal.
The Munjals will be looking at new geographies to sell their products, something that was not permitted under the previous licensing agreement. No specific markets were mentioned.
The stock market responded positively to the split. Hero Honda’s share price recovered smartly from Wednesday’s battering to rise 3.57 per cent on the BSE today and close at Rs 1,679.10. Yesterday, it fell by 5.4 per cent after reports the impending deal had been signed.
Reports of friction between the partners have being doing the rounds ever since Honda set up its subsidiary in 1999. HMSI was barred by Honda’s JV with Hero from entering the motorcycle segment for five years, so it initially manufactured scooters.
However, even after this period, the JV prevented HMSI from making a major move in the motorbike mass market, which is dominated by 100cc bikes. Hero Honda controls over 60 per cent of this segment.
Analysts say the Munjals could form a special purpose vehicle to buy Honda’s shares. While no comment was made on whether private equity partners would be roped in to pick up a part of the equity, Munjal said: “We will not disclose any financial details of the transaction, which will be made public only when the deal is completed sometime next year.”
Merchant bankers say that the Munjals have been talking to private equity firms KKR, Carlyle, Warburg Pincus, Bain Capital and TPG, among others, to fund the Honda stake buyout.
Hero Honda sold 4.6 million motorcycles last fiscal, accounting for over 48 per cent of overall domestic two-wheeler sales. The company has three plants, at Dharuhera and Gurgaon in Haryana and at Hardwar in Uttarakhand. Hero Honda has an installed capacity of over 5 million motorcycles a year. The company has been evaluating a proposal to set up a fourth manufacturing unit in Himachal Pradesh.
HMSI, meanwhile, has announced an investment of Rs 500 crore to set up its second plant near Bhiwadi (Rajasthan) with an annual capacity of 0.6 million units. Once the facility becomes operational in the second half of 2011, the company’s total annual capacity will reach 2.2 million. HMSI is also reportedly considering locations to set up a third facility.