PEs to raise $600m for Honda stake

Private equity investors courting the Munjal family to part buy Honda Motor Corporation's 26% stake in Hero Honda are talking to Standard Chartered Bank, Royal Bank of Scotland and HSBC to raise up to $600 million to finance their share purchase in the India's largest motorcycle firm, said sources directly familiar with the matter. PE giants, including Bain Capital, Warburg Pincus and TPG Capital, are in the race to buy a little below 15% indirect stake in Hero Honda.

"PEs are looking to limit their equity exposure and seeking funds to buy into the business," said a banker who did not wish to be named as talks were private. Interestingly , private equity investors bidding to buyout Patni Computer Systems are also in the market for leverage financing as they increasingly seek acquisition opportunities in the country.

The Munjals, the Hero Group promoters, are expected to acquire long-time ally Honda's stake in a deal topping $1 billion. This transaction, executed through an overseas-incorporated special purpose vehicle , will be backed by bridge loans. At least two PE investors will then acquire up to 60% stake in the SPV, valuing this entity at around $1.5 billion . However, the structuring and valuation of the private equity investment in the SPV has not been finalized. Emails sent to the Munjals and Hero Honda didn't elicit any reply.

The extent of debt financing for the PE investors will depend on the valuation of the SPV warehousing the 26% stake held by Honda. "PEs will be taking between 50-60 % stake in this entity, giving them just under 15% stake in the main company Hero Honda, which will soon be sporting a new name. Hero Honda stock closed 3.30% lower at Rs 1,713 on the BSE, pegging the company's market cap at Rs 34,223 crore.

Recent media reports have named at least six private equity investors—KKR , Carlyle, Bain, Warburg, TPG and Apollo—who have expressed interest in partnering the Munjals post Honda exit. Sources said the Munjals have entered into definitive discussions with at least three, and may end up roping in at least two of them, to part buy Honda's stake. The Munjals' bridge loan facility to acquire Honda's stake is based on the comfort of termsheets extended by these PE investors, as their follow up investment would help them to pay back the short term loans.

Sources said an initial agreement between the Munjals and Honda could be signed shortly, but the entire deal making, including the buy-in of private equity investors would take at least a couple of months.