KKR, TPG vie for Honda's India venture stake

KKR & Co, TPG Capital, Carlyle Group and Bain Capital LLC are competing to acquire a part of Honda Motor Co’s stake in the country’s biggest motorcycle maker, according to five people with direct knowledge of the matter.

Two of the funds might jointly buy 15 per cent, valued at $1.1 billion, in Hero Honda Motors, three of them said, declining to be named before an official announcement. Another 5 per cent might be sold to the Hero Group’s Munjal family, which holds a 26.21 per cent stake in the New Delhi-based company, two of them said.

Honda, Japan’s second-biggest carmaker, and the Hero Group have been in talks on the Tokyo-based company’s plan to reduce its 26 per cent stake in the venture, maker of half the motorcycles sold in India, for more than a year, said three of the people.

“If Honda is exiting the venture, it is definitely a concern,” said Umesh Karne, a Mumbai-based analyst with BRICS Securities. “The Hero Group will have trouble with technology. Also, the companies will be direct competitors, and that may hurt them both.”

Technology agreement
The two partners are in talks for an agreement providing technology from Honda for the motorcycle maker that extends beyond 2014, when the current accord expires, two of the people said. A new agreement would make it more likely for the buyout firms to purchase the stake, one of the people said.

“We are talking with our partner on various areas of the business, but cannot speak about the specific details,” Honda spokeswoman Natsuno Asanuma said in Tokyo.

Hero Group’s New Delhi-based spokesman Ashwani Sharma didn’t immediately return calls made to his mobile phone. Bharatendu Kabi, the spokesman for Hero Honda, declined to comment and referred calls to Hero Group.

Rajeev Gupta, managing director and head of the India buyout team of Carlyle, declined to comment on “investment opportunity rumours.” Amit Chandra, managing director of Bain Capital, Amol Jain, director of TPG’s Indian unit, and Sanjay Nayar, CEO and country head of KKR’s Indian unit, didn’t respond to emails.

Shares of Hero Honda, set up in 1984, have climbed 5 per cent in the past year, giving the company a market capitalisation of Rs 34,850 crore ($7.6 billion) and valuing Honda Motor’s stake at almost $2 billion. The motorcycle maker’s stock rose 0.7 per cent to Rs 1,745.15 at the close of trading in Mumbai.

Boosting production
In 2001, Honda set up a separate subsidiary in India that started selling scooters, and subsequently added motorcycles, competing with Hero Honda. In March, the Japanese company said it planned to invest about 8.9 billion yen ($104 million) to build a second motorcycle plant to meet additional demand.

Hero Honda planned to boost production about 8.7 per cent in the year ending March to more than 5 million motorcycles and scooters, Chief Financial Officer Ravi Sud said in an interview on August 23. To meet rising demand, the company plans to spend Rs 115 crore to add capacity of 3,00,000 units a year at its third plant in northern India by January, he said.

The company reported its first decline in quarterly profit in almost three years in the three months ended June 30, as higher raw material costs eroded gains from selling more two-wheelers. Net income in the quarter fell 1.7 per cent to Rs 492 crore. Sales grew 12 per cent.

Honda Motor renewed its technical collaboration agreement with Hero Honda in June 2004 for 10 years, according to a filing to the Mumbai stock exchange at that time.