Munjals to buy Honda stake in JV

A series of off-market transactions will see Japanese auto major Honda exit its 25-year-old joint venture with the Munjals in Hero Honda with the entire deal likely to be wrapped up in the next six months. The deal, which will be executed in two phases, will see the Munjal family - led by Brijmohan Lal Munjal group - form a special purpose vehicle (SPV) to buy out Honda's entire 26% stake in the venture. This would eventually be thrown open for private equity participation.



According to highly-placed sources, the Japanese auto major has decided to exit the highly-profitable Hero Honda JV — which controls more than 50% of the Indian two-wheeler market — as it focuses more on its fully-owned two-wheeler subsidiary, Honda Motorcycle and Scooter India (HMSI). HMSI has been growing rapidly and is in the process of setting up a second factory in the country.



Rising friction between the two partners and HMSI's growing competition with Hero Honda were the reasons that has prompted the two partners to go separate ways, said market sources. When contacted, a spokesperson for Honda Motor Japan said, ''There is no such plan at the moment."



A spokesman for the Hero group said, ''The information is incorrect. The Hero Group and Honda Motor Co, Japan, have for years enjoyed a very cordial and fruitful relationship, resulting in millions of satisfied Hero Honda customers across the country. Contrary to market speculation, there has been no change in this relationship."

However, sources in the banking sector told TOI that the deal would be completed through an SPV formed by the Munjal family. According to the arrangement being worked out, a foreign bank will extend a loan to the SPV to buy Honda's 26% stake. When the equity transfer is completed, the shares will be pledged as collateral to the financing bank.



In the second leg of the deal, the Munjal family will seek funding in the SPV from a number of private equity funds through quasi-equity route. A banker said negotiations were at an ''advanced stage" with a number of funds. According to sources, funds like KKR, Blackstone and Texas Pacific Group are among those in fray.

Importantly, Honda may offload its stake at a discount to Hero Honda's existing market price. The company's scrip closed at Rs 1,736 on the Bombay Stock Exchange, up 2.14%. At the current market price, Honda's 26% stake in the company is valued at Rs 9,000 crore. However, the banker refused to give the discounted price of the deal, though, it is learnt, that it would be substantial enough for the Munjals to complete the deal without any margin money to the SPV.



Market analysts said Honda's exit from the company is likely to drive down the valuation of the Hero Honda scrip on concerns that the company may not have access to the latest two-wheeler technology. Sources within Hero Honda, however, insisted that the company had adequate R&D to sustain operations competitively. After the deal, the Munjal family will own 52% in the company. As the deal is between the two promoters, Munjal will not have to make an open offer to the public.



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