Hon Hai Precision Industry Co. (2317), the
assembler of Apple Inc. iPads, may seek to renegotiate a planned
133 billion-yen ($1.7 billion) alliance with Sharp Corp. (6753) after
the Japanese TV maker’s shares fell to the lowest in 34 years.
Hon Hai agreed to buy 9.9 percent of Sharp, Japan’s largest
maker of liquid-crystal displays, for 550 yen per share. Sharp
shares have plunged 29 percent below that to 391 yen, meaning if
the deal closed today at the agreed price, Hon Hai would have a
paper loss of $247 million, equal to 49 percent of the Taipei-
based manufacturer’s net income last quarter.
“With the current stock price, Hon Hai won’t be willing to
pay that much, and given Hon Hai has more say in this alliance
than Sharp, the Taiwanese company may request a review,” said
Takashi Watanabe, an analyst at Goldman Sachs Group Inc.
Sharp fell to its lowest level since 1978 after the Osaka-
based company forecast a wider-than-expected annual loss for the
current fiscal year because of its unprofitable solar, panel,
and audiovisual and communications divisions. Sharp Display
Products Corp. is counting on a separate 66 billion-yen tie-up
with Terry Gou, whose Foxconn Technology Group includes Hon Hai,
and related investment companies to return to profitability.
Simon Hsing, the spokesman for Hon Hai, said the company
remains committed to the deal, and he declined to comment on
whether it would seek to renegotiate terms, including the price.
Gou’s Investment
“This is the most important deal we’ve had recently to
realize our goal of greater vertical integration in the supply
chain,” Hsing said. “We worked on it for nine months and plan
to proceed.”
Sharp “currently doesn’t have a plan to change the
price,” Miyuki Nakayama, a spokeswoman for the Tokyo-based
company, said by phone.
Hon Hai, flagship of the Foxconn group, and its affiliates
will buy 121.65 million new shares in Sharp at 550 yen each,
Sharp and Hon Hai said March 27. Gou and related companies will
buy 46.5 percent in Sharp Display, a venture with Sony Corp. (6758),
they said the same day.
The alliance would give Hon Hai access to advanced display
as the Taiwanese manufacturer looks to expand beyond assembly.
Sharp’s shares, which reached a 34-year low of 366 yen on
May 21, rose on May 24 after Hon Hai said it may build a display
factory with the Japanese company in Chengdu, China.
Sony Stake
Gou’s and Sharp’s stakes in Sharp Display will be diluted
to 37.61 percent each after Sony said May 24 it will sell its
entire 7.04 percent holding to the display unit by June 30, and
Toppan Printing Co. (7911) and Dai Nippon Printing Co. said they would
merge their operations at Sakai, Japan, with the display maker,
giving them a 9.54 percent stake each.
“Hon Hai should try to renegotiate the price, because the
loss on the value of the stake and capital expenditure to Sharp
won’t be good for them in the short term,” said Laura Chen, a
Taipei-based analyst at BNP Paribas SA who downgraded the stock
to hold last week and cut her share-price estimate by 16
percent.
“In the long term, Hon Hai still wants the deal because
Sharp has strong technology in panels, solar and electronics
components.”
Hon Hai’s second-quarter earnings per share may fall 61
percent from the prior period partly because of the decline in
Sharp’s share price, KC Kao, who rates the stock buy at Deutsche
Bank AG in Taipei, wrote in a May 21 report. The investment and
the Japanese company’s financial situation also increase the
risk Hon Hai will need to raise funds, he wrote.
Capital Injection
Based on the May 21 closing price of 366 yen, Hon Hai would
realize a loss of NT$6.3 billion ($213 million) on the Sharp
stake, Kao wrote. BNP’s Chen estimates the loss for this period
would be at least NT$5 billion if the transaction value remains
unchanged.
The amount of capital injection needed by Sharp, coupled
with a likely desire by Hon Hai to limit its equity exposure to
the Japanese company, reduces the scope for them to renegotiate
the deal, said Steve Myers, who rates Hon Hai sell at JI Asia in
Tokyo. The two sides have until March to close the transaction,
and there’s no immediate need to model for Sharp’s share-price
declines in Hon Hai income statements because the deal hasn’t
been completed, he said.
Seven Visits
Gou has traveled to Japan seven times since the deal was
announced, Hon Hai’s Hsing said, an indication of the importance
he places on the transaction. The Foxconn chairman also plans to
proceed with his own investment in Sharp Display, Hsing said.
“The deal with Sharp is not just about panels,” Hsing
said. “They have many different products that are of interest
to us.”
Sharp on April 27 forecast a net loss of 30 billion yen for
the year ending March 31, 2013, wider than the 7.6 billion yen
average loss forecast of 23 analyst estimates compiled by
Bloomberg. The LCD and solar businesses may contribute 10
billion yen in losses each, while the communications equipment
and audio-visual unit may lose about 5 billion yen, Sharp said.
Sharp has 20 billion yen of bonds maturing in June and
about 200 billion yen of convertible bonds maturing in September
2013, according to data compiled by Bloomberg. The company’s
cash and near cash stood at 195.3 billion yen as of March 31, a
drop of 19 percent from a year earlier.
A decreasing cash balance and forecasts for continuing
losses may put Sharp in a weak position to refuse renegotiation,
the Tokyo-based Watanabe said.
“I’m not so certain the March agreement will survive as it
is,” said Shiro Mikoshiba, an analyst at Nomura Holdings Inc.
in Tokyo. “There are also the uncertainties over Sharp’s
earnings outlook that makes it unclear whether now is the right
time to invest in Sharp.”
To contact the reporters on this story:
Tim Culpan in Taipei at
tculpan1@bloomberg.net;
Mariko Yasu in Tokyo at
myasu@bloomberg.net.
To contact the editor responsible for this story:
Michael Tighe at
mtighe4@bloomberg.net.
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