Munjals may take yen loan

The Munjals, owners of the Hero Group, are considering taking a yen loan to finance their purchase of the 26% that Honda Motor Co. Ltd owns in Hero Honda, its former joint venture, according to three persons close to the deal.

Further, the promoters are looking at creating a special purpose vehicle (SPV), which will be located in Singapore, a low-tax regime, that will be wholly owned by them. This SPV will be the acquiring entity for all of Honda’s stock, these persons said.

None of the three, each of whom spoke separately to Mint, wished to be identified given the sensitivity surrounding the deal, few details of which have been shared by the Munjals.

“While the SPV will need money in order to pay for the stock, the finance will be in the form of, or largely funded by, debt, which in the case of this transaction will be short term in nature, typically referred to as a bridge facility,” one of the three said.

The bridge loan, however, will be for 70% of the total amount required for the buyout, the three people added. They explained that while the market price for the 26% stake is $2 billion (Rs.9,040 crore),the Japanese auto maker is accepting $1.1 billion for the sale because Hero has agreed to cancel a non-compete agreement.

Bridge loans are a type of interim funding until the next stage of financing is obtained for a transaction. They are normally raised as a quick and short-term means to buying stock in such transactions.

The bridge facility will require some form of collateral, where the first layer of security is the value of the underlying asset, which, in this case, will be Honda’s shares in Hero Honda. As equity within this SPV is sold, the money from the sale will go towards retiring the debt, the three persons said.

Newspaper reports in the run-up to the announcement of the transaction had speculated on the involvement of a private equity (PE) firm in it. However, the Munjals are yet to close this end of the deal, although a fourth person familiar with the deal said it was only a matter of time before this happens.

“Given the Munjals have borrowed this huge amount of money, while PE funds are also keen on getting a foothold in the two-wheeler growth story, it’s a question of who blinks first,” added this person, a consultant from an international advisory and auditing firm added.

As such, the purchase— agreed in principle as a memorandum—is being done in “stages”, company spokespersons had said previously at a press conference.

Meanwhile, a senior official from a PE fund who has been involved in talks with the Munjals over the last six months said: “They (the Munjals) cannot do this deal without the help of a PE fund. How will they do it?” The official did not want to be identified.

It has been confirmed by several people close to the deal that no investment banker has been mandated for this transaction by the Munjals.

Sunil Kant Munjal, a Hero Honda board member said on Thursday on the sidelines of the TiE Entrepreneurial Summit in New Delhi, the company will not be commenting on the details of the purchase plans for the next six months.