Honda's exit gives Bain, GIC 15% in Hero Honda

Hero Investments Private Ltd (HIPL) has agreed to buy Honda Motors Ltd’s 26 per cent stake in Hero Honda Motors for around $851 million (Rs 38,295 crore).

HIPL is the investment arm of the Hero group. It held a 17.33 per cent stake in Hero Honda as on December 31, 2010.

Private equity player B C India Private Investors, an affiliate of Bain Capital LLC, and Lathe Investment Private Ltd have agreed to invest in HIPL to help it fund the buyout.

After the deal, the two will have less than 15 per cent indirect economic interest in Hero Honda, the country’s largest two-wheeler manufacturer, say people involved in structuring the deal.

Lathe is a wholly-owned subsidiary of Government of Singapore Investment Corporation (GIC).

Honda has sold out at Rs 739.97 a share, a more than 50 per cent discount to the current market price. Hero Honda’s stock closed at Rs 1,518.15 on the Bombay Stock Exchange on Tuesday, down 11.75 per cent. The total discount comes to around Rs 3,841 crore.

With this, the Munjals and promoter companies will hold 26.21 per cent stake in Hero Honda.

According to people close to the deal, Bain will pay 70 per cent of the total amount in return for fresh equity, while GIC will pay the rest. The exact stake they will get in HPIL is not known yet. The two together will pay less than Rs 4,500 crore for equity in HPIL, for which permission has been sought from the Cabinet Committee on Economic Affairs.

Bain Capital has taken the assistance of Barclays, Standard Chartered Bank and Nomura Securities to structure the deal.

Hero Investments will use the cash from the two investors to pay the short-term loans it had taken to buy Honda’s stake.

Analysts say the Munjals have been the clear beneficiaries of the arrangement. While they have bought a 26 per cent stake for less than Rs 4,000 crore, the two equity partners will get only a 15 per cent indirect economic interest in the company at a higher price.

People close to the development say an open offer will not be triggered, as the combined economic interest of the two funds will be less than 15 per cent.

In December last year, the Hero Group had said it would buy Honda’s 26 per cent stake in Hero Honda. The two companies signed a definitive licensing agreement on January 24. This pertained to products the company will offer in the domestic market after Honda’s exit. Hero Honda will continue to pay royalty to Honda till 2014, in exchange for the technological knowhow.

Honda, the world’s biggest motorcycle maker, formed the venture with Hero Group in 1984. Hero Honda began selling a model a year later. Honda set up its own unit in India in 2001.