Hero Honda slips on JV breakup, investors may veto deal terms

MUMBAI: Shares in Hero Honda Motors, India's largest motorcycle manufacturer, fell nearly 5 per cent early on Monday on reports that Honda had agreed to exit its stake in the joint venture.

Honda and its Indian partner Hero Group will seek approval for the breakup from their respective boards of directors later this month.

At 9:21 a.m. (0351 GMT), Hero Honda shares had trimmed the fall to 2.9 percent.

A number of institutional investors are set to join hands to oppose the sale of shares by Japanese auto maker Honda to its Indian joint venture partner—the Hero group—at a discount to the current market price, fearing that the Indian promoters will compensate the world’s fifth-largest automobile company by upping the percentage of sales they pay as royalty.

Institutional investors are also uneasy about the fact that the Hero group is likely to sell Honda’s 26% holding to private equity investors at a premium to the purchase price but below the market price, say people familiar with the thinking of the shareholders.

A leading financial intermediary, representing one of the top institutional investors in Hero Honda Motors , has approached some other investors in India’s largest two-wheeler company seeking support to protest the terms of the proposed deal.

A top official with a large investment firm, which owns shares in Hero Honda, confirmed the development.

“Institutional investors will protest if the price of the stake sale is at a discount to the current market price. There is also talk about increase in the royalty to Honda. Both these steps are not good for minority shareholders,” said the official who spoke on the condition that he not be named, as he is not authorised to speak to the media.

Royalty refers to payments for technology. Honda, the world’s largest maker of motorcycles, will continue providing technology support to the Hero group even after the joint venture comes to an end.

Aberdeen Asset Management, which owns 5.14% in the company, is its largest institutional shareholder. Capital World, Life Insurance Corporation of India and Vanguard have holdings ranging from 1-2% in the Indian company.

Honda Motors is close to selling its stake in Hero Honda to the Munjals, snapping a 25-year partnership with the Delhi-based group.

Neither the Munjals, the owners of the Hero group, nor Honda have commented publicly on the structure of the transaction. But ET had reported earlier that the Hero group is likely to buy the Honda stake and then offload shares to PE investors.

According to media reports, the joint venture agreement between the two allows one of the partners to buy out the other at a discount of 33% to the market price under some circumstances.

Hero Honda’s spokesman directed this reporter to the Hero group. The Hero group spokesman did not respond to calls on his mobile phone. An email query also remained unanswered

Institutional activism is common in the West where pension funds and other fund managers often take on managements of companies when they reckon that other shareholders are being short-changed. In India, there have been very few such episodes.

Shareholders are also worried that Hero Honda may increase the royalty payment to Honda to share technology. The company now pays 2.5% of its annual sales as royalty to Honda and an increase in the share of royalties—news reports have quoted 8%—is bound to impact the company’s earnings. A fund manager aware of the negotiations said the two sides were likely to agree at 5%.

India’s largest car maker, Maruti Suzuki, faced investors’ ire in July after it agreed to pay higher royalty and technology fees to its Japanese parent Suzuki, triggering a slew of rating downgrades by brokerages.

A fund manager with a private mutual fund, which also holds Hero Honda shares in its portfolio, said he has not been approached by other shareholders to try and thwart the deal. “But if the deal happens at a discount and promoters sell the stake at a higher price to private equity firms, we will join the opposition,” the fund manager said