Wednesday, November 24, 2010

Hero and Honda to shortly finalize termination of their 25-year old JV partnership

Hero and Honda to shortly finalize termination of their 25-year old JV partnershipIt had been one of the major success stories in the automobile sector. Hero Motors and the Japanese giant Honda had came together in 1984 to build and sell motorbikes much before the door was opened to reforms in the country. The Hero Honda motorcycles had changed the two-wheeler market forever in the country and now suitably enjoy the largest two-wheeler manufacturer position.

But all this could change in a matter of few days now. It was in 2004, the Hero group and Honda extended their agreement for 10 years, under which the Japanese partner would continue to provide technology to the JV. The technology agreement is valid till 2014. But the dream run is all set to end with Honda itself is contending in the market with its own host of motorcycles competing directly against the Hero Honda stable. There has been various reports in the past few months about the impending end of the JV in which Honda has 26 percent stake.

According to business daily, The Economic Times report, representatives of Honda Motor Company of Japan and the Hero group are set to meet shortly to give shape to the break-up of their more than 25-year-old partnership at Hero Honda. For the past few months, the two partners have been discussing a change in the ownership structure of the company that would see the Hero group buy out Honda and acquire majority control over the bike maker.

The report mentions that the meeting, which will take place overseas, could also see the option of Honda making a counter-offer to the Hero group being discussed, as the Japanese company is unhappy about the extent of discount demanded by the Munjals, the Indian promoters.

According to the report which quoted a person with knowledge about the transaction, under the agreement between the two partners, if either of the two parties wants to exit, the other partner has the right to buy these shares at a 30-40 percent discount. But if this offer is not acceptable, the seller can turn buyer and offer to purchase the shares of the other partner at a premium, according to the agreement. As of Monday’s stock price, 26 percent of Hero Honda is worth Rs 10,000 crore. Both Honda and the Munjals enjoy right of first refusal over each other’s shares.

The offer from the Munjals to buy out Honda at around 40 percent discount, while compatible with their agreement, has not found favour with the Japanese company, the report quoted a source saying. In response, Honda has made a counter-offer that is being “studied” by the Munjal family. No decision has been taken by the Munjals, the source said quoted the report.

It is known that the disagreement between the two partners started after Honda asked Hero Honda to increase supply of components from HMSI. The company wants to increase its royalty from the sales of the joint venture, but has been unable to do so because bulk of the sales, about 60 percent, are contributed by relatively older bikes—Splendor and Passion. Besides, according to the terms of the current agreement, Hero Honda cannot export bikes to foreign markets, which are fast turning out to be a major source of revenue for its Indian rivals such as Bajaj Auto. Now Honda with its own motorcycles arm is in direct competition with Hero Honda in Indian market.

Hero Honda reported its highest monthly sales at 5.05 lakh units in October, registering a jump of 42.75 percent over the same month last year. The Hero group is planning to set up its own R&D centre in preparation for life after 2014 should it end up running the company on its own.

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