Decks have been cleared for Hero Group and Honda Motor to part ways, with the two partners resolving the vexed Hero Honda royalty payment issue. Though the two partners ? who jointly built the world?s largest motorcycle manufacturer in India in 26 years ? had agreed to part ways, royalty payment was proving to be a stumbling block to the final separation.
According to industry sources, royalty payment by Hero to Honda in lieu of supply of technology would be in two parts. Hero would pay around 4-5% of the overall sales as royalty till 2012 and raise it to 8% during 2013-14 when the 10-year technology agreement expires.
This would mean that initially, Hero?s payout would be limited. However, it would still increase from the current Rs 500 crore, which is 2.2% of overall sales.
Sources said Honda initially wanted 10-11% royalty until 2014, a demand which was not acceptable to the Munjals, promoters of the Hero Group. It has also been agreed that during the period, Honda will supply technical know-how for three new products.
When contacted, spokesperson of both Hero and Hero Honda declined to comment.
As earlier reported by FE, the Munjals and Honda have already finalised the terms of their split in terms of pricing of the 26% equity of the latter in the JV. The Munjals will float a special purpose vehicle (SPV) which will buy Honda?s stake at a discounted price.
The Munjals will buy the shares at Rs 1,200 apiece against the average trading price of Rs 1,800 a share. Later, around 70% stake in the SPV will be sold to a clutch of private equity firms like Carlyle, KKR and Warburg Pincus at a slight premium ? Rs 1,500 per share. Through this structure, the Munjals would eventually hold around 35% in Hero Honda, up from the existing 26%.
While the two have decided to part ways, it has been decided that Honda would continue to provide technological support till 2014. Whether the technological agreement would continue beyond that is still not clear.
The separation has happened due to differences over critical issues, which could not be resolved. While the Hero Group wanted curbs on export and technological development under the JV agreement to be lifted, Honda had wanted more royalty payment from the Indian firm.