The Munjal-led Hero Group said on Tuesday it will buy out Honda Motor Corporation’s entire 26% stake in Hero Honda Motors at Rs 739.97 per share, about 51% less than the current market price, pegging the deal size at around Rs 3,842 crore.
Shares of Hero Honda, the world’s biggest two-wheeler maker, closed 0.77% below at Rs 1,518.15 after touching a low of Rs 1,472 in volatile trading on the BSE, as investors discussed the discount in the deal aided by private equity firms.
Under the deal, group firm Hero Investment Pvt Ltd, which currently holds 17.3% stake in Hero Honda, would raise funds for the acquisition from Bain Capital and Singapore’s Lathe Investment.
Last month, the company received an approval from Foreign Investment Promotion Board for the fund raising that also needs clearance from the Cabinet Committee for Economic Affairs.
“The funds received as investment made in the holding company by the private equity firms will be used to retire a significant portion of the debt that has been raised by HIPL recently for financing the acquisition,” Hero Honda said in a statement.
The two PE firms may get a stake of around 30-40% in Hero Investments, which effectively gives them a 16-18% stake in Hero Honda.
While a Hero Honda spokesperson refused to comment on the development, the Hero Group said it had nothing to stay immediately beyond what has already been said in its statement.
“Further details will be shared after receiving the necessary approval from CCEA,” it said.
A query to Honda Motor Corporation on why it agreed to sell its stake in the company at such a high discount, also went unanswered.
But the investment community was concerned.
“Though we knew Honda was exiting at a discount, this is far below what was expected,” said a senior analyst at a brokerage firm, who asked not to be named.
“Surely, Hero’s royalty payments to Honda, which will keep supplying technology till 2014, will compensate for this.”
However, Pawan Munjal, managing director of Hero Honda had said last December that royalty payments would actually go down over time.
Two other analysts HT spoke to said Hero and Honda must have an understanding that has not been shared in the public domain yet.
The two partners ended their 27-year-long joint venture last December. After the deal, Hero Investment’s stake in the two-wheeler company would go up to 43.33%. The Munjals also own 8.67% in the company through Bahadur Chand Investments. Together, the Munjals would own 52% stakes in the firm. Hero Honda makes motorcycles such as Splendor, Passion, Karizma ZMR, Hunk, CBZ Xtreme and scooter Pleasure. Its sales have grown 17% in the current fiscal year so far to 4.88 million units. The company looks set to breach the 5 million unit mark for the first time in a financial year.