October 2010
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Hero Group to buy out Honda Motors' 26% stake in the joint venture

When it comes after 26 years of a seemingly happy marriage, talk of separation usually sparks more questions than answers. The possible end of a partnership that created India's biggest motorcycle maker—Hero Honda Motors—is no exception.

India's Hero Group is looking to buy out Honda Motors' 26% stake in the joint venture and needs to raise about $2 billion to do so. Hero already owns 26% of the company, with the rest held by other investors. It is still early; Hero is only just putting together a team of bankers to help it find the money, and both companies are quiet about their intentions.

But if it strikes a deal, Hero is going to have to answer a number of questions for the rest of Hero Honda's shareholders.

For starters, what is Hero going to do about its lack of research and development facilities? Honda's role in the joint venture is to provide technology, and its agreement to do so will come up for review in 2014. Will it continue the pact, without a stake in the company, and if so, at what cost? Even with Honda as a co-owner, Hero's royalty payments on technology have been rising faster than sales, reaching $90 million in the year to March.

Second, what is going to happen to the “Honda” in the brand? The Japanese name adds a premium to the company's products that Hero can't offer on its own.

Critically, for Honda, this wouldn't be a an exit from India's motorcycle market, which still boasts four times the number of sales as the nation's car market. Honda has been selling its own bikes in India for nearly a decade, targeting mostly higher-end consumers. It is in the process of building a second factory with the aim of expanding its production there by nearly 40% and increasingly competing with Hero Honda for entry-level buyers.

The risk for Hero Honda's shareholders is that the Japanese company won't be eager to prop up a rival with technology, or its brand, without a stake in that company's success.

To be sure, Hero Honda's grip won't be easy to erode. The company commands about 44% market share in the market; it is seen as a home-grown brand with strong recall among buyers.

It is difficult to imagine how life after this break-up will be the same.

Source: WSJ

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