Munjals, Honda close to rejig agreement

In what may pave the way for Honda Motor's exit from Hero Honda, their joint venture with India's Hero Group, the latter has agreed to royalty payments of eight per cent of overall sales per annum to the Japanese automaker in return for a technology makeover and a stake sale.

This would mean a three-fold increase over the Rs 500 crore Hero Honda presently pays every year as royalty fees to Honda Motor Corporation. The outgo amounts to 2.2-3 per cent of annual sales.

The increased annual payment would be till 2014, when the present technology sharing agreement is to lapse, at which point or before, it would be renegotiated.

Hero Honda is India's largest seller of two-wheelers. Honda is Japan's second largest auto maker. The Hero Honda collaboration began in 1984.  

Industry sources in the know say negotiations are at an advanced stage and a final decision would be taken over the next few days. A spokesperson at Hero Honda declined to comment.

Under the proposed agreement, Honda Motor Corporation will supply the technology for three new products to Hero Honda. The existing product portfolio would remain. In return, sources said, Honda has agreed to bring their 26 per cent stake in the JV down to 20 per cent, selling the balance to the Munjals of the Hero Group at a discount to the current market price. Honda had previously been in two minds about selling their stake at the hefty discount the Munjals had asked.

The stake sale proposal was initially made by the Munjals to Honda Motor. The Munjals, with individual stakes and through a couple of investment companies, hold 26.21 per cent.

Honda  has been evaluating proposals for some time for a deal which could even see it exiting from the JV.  The company was reported to be dissatisfied with the amount of royalty it was getting from the Indian partner. Honda, it is said, is also keen on focusing on the growth of its subsidiary, Honda Motorcycle and Scooter India.

The Indian promoters are said to be talking to private equity companies, including Blackstone, KKR, Carlyle, Temasek and CD&R, to raise cash for funding the stake buyout. Sources say the Hero Group is keen on funding the buyout of Honda's stake through debt and had kept the equity option as a final one.