NEW DELHI: Japan’s Honda is believed to be in talks to sell its 26% stake in Hero Honda Motors, the enormously successful, 26-year-old joint venture responsible for transforming the local motorcycle industry and spurring an entire generation of Indians to take to biking.

A person close to the development said Honda and its Indian partner, the BM Munjal-owned Hero group, are discussing a formula that would enable the Japanese firm to sell its shares at a discount. A Munjal family company will purchase most of the shares with some help from private equity firms, he added.

The news, broken first by ET NOW, this newspaper’s business channel, drove down the shares of Hero Honda in the market on Tuesday as investors worried over the impact the separation will have on India’s largest motorcycle maker.

The management of both the companies, though, strongly denied it. A Honda Motors spokesman told Bloomberg News that the company had no plans to sell. A statement issued by the Hero group said it has enjoyed Rs very cordial and fruitful relations’ with Honda and there is no change in the relationship

in any manner. A top Hero Honda executive said ‘stake sale was not even on the table’, though he added that

discussions between the two partners centred around securing the future of the joint venture.

Hero Honda shares slumped 6.8% before the denials triggered a pull-back. The shares ended down just 0.11% at Rs 1,790.

But the person with the direct knowledge of the situation said talks are on and the Munjal-owned company incorporated overseas will buy the shares from Honda and take the Hero group’s stake in the motorcycle firm to 52%.

At current market price, the 26% stake is being valued at Rs 9,293 crore,

or $2 billion, but this person said the Hero group, which has the right of first refusal over Honda’s shares, is likely

to pay at a discount as part of an amicable settlement.

He added that the Hero group will raise money from private equity investors in the new company after the first leg of the transaction, giving them an indirect stake in Hero Honda. Discussions are on with three private equity firms and this new holding company will be valued on the basis of its 26% in Hero Honda, the person added. Other combinations, such as a direct sale by Honda to a private equity firm, are also being discussed, but no details were available.

A senior auto industry veteran, however, said Honda and the Hero group have been sparring over some key issues such as royalty and spare parts purchases for some time now.

Honda wants to increase its royalty from the sales of the joint venture but has been unable to do so because bulk of the sales, about 60%, are contributed by Splendor and Passion, two old bikes. Honda also wants the Hero group to route all spare part purchases through Honda Motorcycles and Scooters India, (HMSI), which the Hero group has been resisting for a long time. “This could be Honda’s way of getting the Hero group to the negotiating table,” he added.

The Hero group and Honda came together in 1984 to build and sell motorbikes in the country and their venture was an instant hit. A consumer boom triggered by former prime minister Rajiv Gandhi’s economic reforms and the success of another Indo-Japanese joint venture, Maruti Suzuki, quickly propelled Hero Honda to the top of the sales charts.

Its cleverly-worded, catchy slogan, Rs Fill it, Shut it, Forget it’ focused on the Indian consumer’s concern for mileage and reliability, helping shut out competition completely. Very soon, Honda was selling more bikes than Bajaj Auto’s scooters, despite the latter’s decades-old headstart. A separation at India’s largest motorcycle maker, if true, will have large implications for the company and its shareholders.

Hero Honda has spent the last few months trying to stare down the threat from a resurgent Bajaj Auto, and a shareholder squabble and split will divert attention at a very crucial time.

The second issue relates to access to technology. Honda has shouldered much of the burden, though the Hero group’s marketing acumen and knowledge of the consumer has also played a big role in the company’s success.

“For the next three years, Hero Honda will not have any problem as it will have technology commitment. But what will happen after that is yet to be seen,” Ramdeo Agarwal, managing director of brokerage firm Motilal Oswal Securities, said. The current technology agreement between the two companies is due to expire in 2014.