Hero may buy Honda pie through Singapore SPV

The Munjal family-promoted Hero group is likely to purchase the entire stake of Honda Motor Co in their joint venture Hero Honda Motors Ltd through a special purpose vehicle incorporated in Singapore.

The group is also in talks with three international funds to offload a part of its stake in the special purpose vehicle, a source said.

According to the plan, the Munjals will buy the complete 26% stake owned by Tokyo-based Honda Motor for $1.2 billion, a discount to the current market value of $2 billion, and park it in the family-owned Singapore SPV.

“In order to raise money for the deal, they would offload
49% stake in the SPV to the three global funds,” the source said.

The three funds would be offered the 49% stake for around $600 million, which would constitute half the value of the Honda stake. The rest would be infused by the Munjals by way of debt or other routes.

The source said Hero Honda might make an announcement about the deal as early as end of September.

An analyst with a leading international brokerage firm said at $1.2 billion, a 26% stake is at much discount and brings the valuation of Hero Honda at around Rs22,000 crore, down from Rs35,000 crore.

“A discount to the Honda stake is reasonable as once Honda walks away, the Hero group will have no technology. Also, because the company doesn’t do its own R&D, the value of the company automatically comes down,” he said.

There is no clarity so far as to where the company will source technology from beyond 2014, when its technology sharing contract with Honda expires.

But this won’t quite leave Hero Honda impaired, the analyst said. “India is not a technology-driven market, instead it is a price-driven market and with an entire gamut of products that Hero Honda has currently and a strong domestic demand, it is not going to be a tough road ahead for the company.”

Also, Hero Honda can use time till 2014 to develop its own R&D or purchase it from other companies, the analyst said.

In a recently released report on the domestic two-wheeler industry, CARE Research estimates domestic two-wheeler demand to maintain the strong growth momentum this fiscal, registering a growth of 19.4%. The industry has witnessed 27% year-on-year growth in domestic sales during April-August 2010 period.

The growth will be spearheaded mainly by Hero Honda, which has witnessed a healthy growth of 24% so far this year, analysts said.