Higher royalty for Honda in split from Hero

Negotiations to break up the country's most successful automobile joint venture, Hero Honda Motors Ltd, has entered the last lap, with a board meeting expected later this week to announce the details of a corporate divorce in which sweetened royalty payments form a key part of the deal. The Hero group Ads by Google
will buy out the 26% stake held by Honda Motor Corp in the world’s largest two-wheeler maker but will continue to get technology from the Japanese firm – at a price tag that spells the terms of separation under which Honda will eventually be free to concentrate more on its own bikes for India.

Industry sources told Hindustan Times that the estimated value of the stake sale is likely to be around $1.2 billion (Rs 5,400 crore), though the current market value of the stake is around $1.9 billion (Rs 8,400 crore).

Hero Honda shares fell 5.4% to Rs 1,621.30 on Wednesday in a negative reaction to the break-up, after falling as much as 9% to a two-month low of Rs 1,559.

Details are awaited but the Munjal family that controls the Hero group is said to be in talks with various banks to raise a bridge loan to buy out Honda before divesting the bought-out stake to a clutch of private equity firms that include Bain Capital, TPG, Carlyle, Warbug Pincus and Kohberg Kravis Roberts.

At the centre of the buy-out is a steep rise in royalty payments to Honda, which is expected to go up to as much as 8% of the firm’s sales from the current 2.6%. The removal of a government ceiling of 5% of domestic sales saw the rate increasing in many companies such as Maruti Suzuki earlier this year.

Hero Honda, however, has been an exception so far.

Honda will continue to provide technology to Hero Honda motorbikes until 2014 for existing as well as future models.

The dip in the company’s stock at more than 9% this year, lags the automotive sector index. Most brokerage houses have maintained a negative outlook for the company’s stock in the short term