Hero eyes Ducati takeover quest

Ducati Motor Holding SpA (DMH), maker of luxury bikes ridden by celebrities such as Brad Pitt, is among assets being examined by Hero MotoCorp Ltd. (HMCL) as India’s biggest motorcycle maker looks for acquisitions to expand overseas.

“Lots of people have been coming to us with Ducati -- not one banker but many bankers,” Pawan Kant Munjal, managing director of Hero, said in a March 2 interview in New Delhi. “We’re talking to a lot of people. Not just Ducati -- whoever comes to us, we talk to them.”

Ducati would add products such as the $28,000 Superbike 1199 Panigale S Tricolore to a company that’s amassed a $1 billion war chest selling bikes for as little as 38,053 rupees ($763). Hero may be seeking to replicate the success of Tata Motors Ltd. (TTMT), maker of the world’s cheapest car, which is seeing profits surge after buying Jaguar Land Rover Plc.

“It is an excellent fit -- Ducati is a big brand and has a lot of technology; Hero is looking to be a serious global player,” said Deepesh Rathore, managing director of IHS Automotive in India. “Hero might get it cheap. Thanks to the European slowdown, Ducati’s numbers haven’t been great.”

Hero, which in December 2010 decided to exit a 26-year partnership with Honda Motor Co. (7267), the world’s largest motorcycle maker, is looking to gain technology through partnerships and acquisitions after that licensing relationship ends in 2014. Last month, Hero entered into a partnership with Erik Buell Racing, where it would sponsor two EBR teams in the AMA Pro Racing National Guard Superbike Championship in return for technology and design support for future models.
Hong Kong IPO

Hero (HMCL) has cash reserves of about $1 billion, Munjal said. The company had investments of 37.5 billion rupees, cash and bank balances of 1.4 billion rupees, as well as reserves and surpluses of 40.8 billion rupees as of Sept. 30, according to company’s latest earnings statement.

Investindustrial SpA, the Milan-based private-equity company that owns Ducati, may hold an initial public offering of the luxury-motorcycle maker in Hong Kong this year or sell it to a rival, two people familiar with the plans said last month. A spokesman for Investindustrial wasn’t immediately available to comment late last week.

Investindustrial is seeking to sell or list Ducati for as much as 1 billion euros ($1.3 billion), the Financial Times reported last month, citing Andrea Bonomi, chairman of the European buyout firm.

Bayerische Motoren Werke AG (BMW) said last month it’s not interested in buying Ducati, which was delisted in 2008 from the Milan stock exchange.
Expanding Outside India

Hero and Bajaj Auto Ltd. (BJAUT) are looking to expand overseas as competition intensifies in India, the world’s second-biggest motorcycle market after China, as Honda, Yamaha Motor Co. (7272) and Suzuki Motor Corp. (7269) expand capacity in the country.

Honda is increasing its operations in India and will spend as much as 10 billion rupees on its third factory near Bangalore in southern India that will be ready in 2013, the company said in August. When complete, Honda will have the capacity to build 4 million two-wheelers in India annually.

Motorcycle sales in India grew 15 percent in 2011 to 9.95 million units, according to data from the Society of Indian Automobile Manufacturers. The industry body said Jan. 10 it expects deliveries of two-wheelers, including motorcycles and scooters, in the year beginning April 1 will increase 11 percent to 14 percent.
Africa, Latin America

Still, the Indian market is still profitable for Hero. Net income at Hero rose 43 percent to 6.13 billion rupees ($123 million) in the quarter ended Dec. 31 and expects to sell more than 6 million units in the fiscal year to March 31, New Delhi- based Hero said on Jan. 19. In the 11 months to February, Hero has sold 5.7 million two-wheelers, it said on March 1.

Hero is looking to begin sales in Africa and Latin America this year, following Bajaj Auto, which sells more than 35 percent of its products overseas and expects to exceed its export target of 1.5 million units in the year ending March 31.

Hero aims to export 1 million units annually in five or six years, Munjal said.

“We’ve been seen as a utility-bike maker, fuel-efficient bikes, and somebody who’s at the lower level of the market, who’s more small-town and rural-market focused,” said Munjal. “So our ambition is to become one of the biggest global two- wheeler players and to do that, you cannot only be in one small segment.”
Following Tata

Hero’s shares declined as much as 3.6 percent for the biggest intraday loss since Feb. 27, and traded at 1,891.80 rupees as of 3:13 p.m. in Mumbai. The benchmark BSE India Sensitive Index (SENSEX) dropped 1.5 percent.

“Investors are scared about Hero’s plan of buying Ducati,” said Umesh Karne, an analyst with Brics Securities Ltd. in Mumbai. “Hero will have to take on the burden in terms of Ducati’s debt so initially there may be some pain.”

Indian companies have bought luxury brands and succeeded before. Jaguar, acquired by Tata Motors from Ford Motor Co. (F) in 2008 for $2.4 billion, has helped drive profitability for India’s biggest automaker. Tata’s net income last quarter increased 41 percent to a record 34.1 billion rupees, led by the Jaguar unit, which is generating more than half of the parent’s revenue.

Hero may follow Tata’s lead should the motorcycle maker negotiate a cheap price for Ducati, according to Basudeb Banerjee, an analyst with Quant Broking Pvt.

“If they pay the current market price, it could be negative as Ducati will take at least two years to turn around,” said Banerjee, who’s based in Mumbai. “If they get it a low price, then it could be good for Hero as they will gain technology and also the Ducati brand, which is strong around the world.”