Honda Motor prepares to exit Hero Honda

Honda Motor Company, Japan’s second largest auto maker, says it is evaluating proposals for a deal which could even see it exiting from its joint venture with the Munjals of the Hero Group in Hero Honda, now the world’s biggest two-wheeler manufacturing company.

The proposal was made by the Munjals to Honda Motor. The latter’s technology licensing agreement for the JV is to end only in 2014. Honda Motor has 26 per cent stake in Hero Honda. The Munjals, with individual stakes and through a couple of investment companies, hold 26.21 per cent. They have reportedly shown interest in buying a direct six per cent stake from Honda in the company.

According to sources, senior executives from Honda Motor had flown to New Delhi last month to meet the Munjal family and discuss the proposed deal. In an interview last week to Australia’s Sydney Morning Herald, Tatsuhiro Oyama, senior managing director, Honda Motor Company, said, “The (Munjal) family has its own intentions; we are considering them.”

The Indian promoters are said to be talking to private equity (PE) companies, including Blackstone, KKR, Carlyle, Temasek and CD&R, to raise cash for funding the stake buyout. Sources say the Hero Group was keen on funding the buyout of Honda’s stake through debt and had kept the equity option as a final one.

Sources add that most of the PE companies approached by the Hero Group have not shown keen interest in the deal.

As of today’s closing price of Hero Honda, Rs 1,861.70 on the Bombay Stock Exchange, Honda’s stake is valued at Rs 9,665 crore, through its ownership of 51,918,750 shares. When asked, a Hero Group spokesperson declined to provide any comments.

Honda mobike plans
Meanwhile, Honda has decided to shed its premium tag and has plans to be in the low-cost bike segment, starting with a motorcycle costing just $612 (Rs 27,000, at today’s exchange rate).

The company plans to retail this bike in emerging markets such as China and India. Presently, no motorcycle in India is sold at such a price, although Hero Honda and Bajaj Auto have said they were trying to develop one for Rs 15,000-20,000.

Honda’s plan is to be become the entry-level bike producer for low-income families in developing markets like India. For thousands of buyers in India every year, the Splendor from Hero Honda, the largest bike brand in the world, remains their first one. The Splendor, known for its superior mileage, costs around Rs 41,200 and is one of the lowest priced products in the bike market, besides the CD-Dawn costing Rs 34,500 (ex-showroom, Mumbai).

This new low-cost bike from Honda will challenge established products such as the Splendor, while aiming to offer equal performance in terms of power and mileage.

Honda Motorcycle & Scooter India, the wholly owned subsidiary of Honda, Japan, is setting up a new factory, to take its total annual capacity to 2.2 million units per annum from 1.6 million units presently.