Hero and Honda Break-Up Confirmed

It’s now confirmed that Honda Motor Corporation is exiting Hero Honda, the joint venture between Indian Hero group (Munjal Family) and Honda Motor Corporation of Japan. Earlier it was reported that the joint venture will break down but none of them (Hero group and Honda) commented on the break up issue.

According to Kydo, Japanese Nikkie business daily “Honda and the Hero Group have reached the basic agreement this week to dissolve the partnership,” Nikkei said, adding that the two companies will seek final approval from their respective board of directors later this month for the break-up.

However, the two companies, which renewed the agreement for technology support from Honda to the JV in 2004, will let the pact run till its expiry in 2014.

Honda will sell its entire 26% stake at US $ 1.2 billion (approx. 5,500 crore) to Hero group of Munjal family as early as March next year and will not provide any technical support after the expiry of technical agreement in the year 2014.

The deal was not taking place due to the price which Honda was asking for its stake. Honda wanted to close the deal at current market price where Hero group wanted to close the deal at 40% discount to its current price.

At current market price Honda’s stake is valued around Rs. 9,000 crore. As Honda agreed to sale its stake at Rs. 5,500 crore, it seems Honda has agreed on the price offered by Hero group. But in return Honda has increased the Royalty payment.

Though, much of details have not been disclosed publicly by both the company, according to CNBC TV 18 the rate has been hiked to 8% from current 3%. It also stated that the 8% for 3 new variants and not for entire product portfolio, but other sources stating that its for entire sales of Hero Honda.

If Hero Honda will pay royalty on entire sales, It will need to pay approximately royalty amount of around Rs. 2500 crore from current royalty amount of Rs. 500 crore. It seems like Honda has smartly closed the deal. We will have impact study once one of the company officially announces how the deal took place.

– Mahavir Kothari