Private equity groups eye stake in Hero Honda

Two US private equity groups are eyeing a strategic stake in India-based Hero Honda – the world’s largest motorcycles maker – as India’s Hero and Japan’s Honda seek to end their joint venture, people familiar with the matter said.

TPG Capital and Carlyle have expressed interest in teaming up with Hero’s Munjal family to buy out Honda’s 26 per cent stake in Hero Honda.

But the deal hinges on the two partners finding a consensual way to end their venture, another source said.

Another person familiar with the matter said that the Japanese group was looking for a high offer to quit the venture.

Hero Honda, which was set up in 1984, has a market capitalisation of about Rs348.5bn ($7.6bn), valuing Honda’s stake at nearly $2bn.

“Hero will need a strategic investor to complete the deal, they don’t have the cash to buy [the Honda stake] on their own,” said an Indian private equity executive who did not want to be named.

The volume of private equity deals in Asia in the first six months of this year has reached more than $11bn, almost treble last year’s volume during the same period and the highest seen since 2008, according to figures from Dealogic, the data company.

In particular India’s fast-growing market has attracted several buy-out groups sitting on large piles of cash, said V. Jayasankar, head of private equity at Kotak Investment Banking, who estimates that the total volume of private equity deals in the country this year could top $8bn.

Honda, Japan’s second-largest automaker, and the Munjal family have been in talks to end their partnership for several months, people close to the group said.

Honda wants to exit Hero Honda as it seeks to build up its 100 per cent owned Indian motorcycle subsidiary, which made 1.55m units last year, at the expense of the larger joint venture, which made 4.9m units.

It is believed that the Delhi-based Munjal family, which owns Hero, wants to end the joint venture because of disagreements with the Japanese group over expansion plans.

Hero Honda’s three existing Indian factories are already operating at full capacity, cranking out around 400,000 two-wheelers every month.

Waiting periods for the most popular products are growing and executives at the company are carrying out feasibility studies and scouting potential locations in 10 states across India, for building a fourth factory.

“The Munjals want Honda out of the business to expand their operations,” said one person close to the deal.