Hero Honda shares tank on JV termination report

MUMBAI: Shares in Hero Honda Motors fell over 5 percent on Wednesday, after media reports that the board of Hero Corporate has approved the termination of the joint venture with Honda Motors.

Hero Corporate will buy 26 percent of Honda's stake in the joint venture for $1 billion to $1.2 billion. The board of Hero Corporate expressed concerns on higher royalty payment after the breakup, it said.

Shares in Hero Honda was trading down 7.14 percent at Rs 1,592.00 at 2:24 PM in BSE.

The first phase of the two-tiered deal, likely to be announced before Christmas, will see Munjals acquire the foreign partner’s stake through a special purpose vehicle (SPV) by raising a bridge loan, two persons familiar with the development told ET.

The Indian promoters will subsequently divest 60-70% stake in this SPV to a group of 2-3 private equity firms to pay back the loan, the first person said. Munjals have zeroed down on six PE firms including Carlyle, Kohlberg Kravis & Roberts (KKR), TPG, Bain Capital and Warburg Pincus.

While Munjals are acquiring the entire stake at half its current value, the stake sale to the PE firms will also be at a discount, said the first person.

The deal has been structured in two phases as the joint venture partners have the first right of refusal in case one of them call it quits.

Once this two-legged transaction concludes, the Munjals will emerge as the largest shareholder in Hero Honda with a combined direct and indirect holding of 34-36% and the PE funds will own an indirect stake of up to 16-18%.

Honda, on its part, will completely exit the joint venture and focus solely on its wholly-owned company Honda Motorcycles & Scooters India.

It will continue to charge the same royalty for technology support to Hero Honda as per the existing agreement that expires in 2014.