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Hero Honda falls 9 pct on JV termination report
December 15, 2010 / 9:13 AM / 7 years ago

Hero Honda falls 9 pct on JV termination report

MUMBAI (Reuters) - Shares in Hero Honda Motors fell as much as 9 percent on Wednesday, after a TV channel reported the board of its Indian partner has approved the termination of the joint venture with Honda Motor.

A worker cleans a Hero Honda logo inside its showroom in Hyderabad April 19, 2010. REUTERS/Krishnendu Halder/Files

Hero Corporate will acquire Honda Motor’s 26 percent stake in Hero Honda, India’s largest motorcycle maker, for $1 billion to $1.2 billion, CNBC TV18 channel reported, citing unnamed sources.

It said the board of Hero Honda, the joint venture which was formed in 1984, was likely to meet on Thursday to approve Honda’s exit from the venture.

Hero Honda shares were down 6.8 percent at 1,598 rupees at 2:23 p.m. (0853 GMT), after falling as much as 9 percent to their lowest level in two months, while the main Mumbai market was down 0.7 percent.

A Honda spokeswoman in Tokyo said the company could not comment on the report, adding it would make any announcements at the appropriate time.

Calls to the spokesman for Hero Honda in New Delhi were not returned.

More than 500,000 Hero Honda shares were traded at the Bombay Stock Exchange, nearly eight times the average daily volume over the past 30 days.

The stock is down more than 9 percent this year, lagging the sector index that is up by a third.

At Tuesday market price, a 26-percent stake in Hero Honda was valued at $2 billion.

CNBC TV 18 said the Indian partners of the joint venture, which was formed in 1984, would make royalty payment of 23 billion to 24 billion rupees ($508 million to $530 million) to Honda over three to four years as part of the JV termination deal, the report said.

The Hero Corporate board expressed concern over the high royalty payment, the report said.

“If the technology transfer continues and Hero has to pay royalty for the next 3-4 years, this could seriously dent profitability,” said Kunal Dalal, analyst at brokerage KR Choksey Shares in Mumbai.

Dalal said royalty payment was about 2.5 to 3 percent of sales now and at 24 billion rupees over three to four years that would go up to 8 percent, impacting Hero Honda’s earnings per share.

Local media had earlier reported that the Indian partners in Hero Honda would first buy Honda’s stake by raising a bridge loan, and then sell a significant portion of the stake to a group of private equity firms.

(Reporting by Sumeet Chatterjee; additional reporting by Tanmaya Nanda in MUMBAI and Chang-Ran Kim in TOKYO; Editing by Ranjit Gangadharan)

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