Foxconn deal for Japan's Sharp in doubt after last-minute hitch
Taiwan's Foxconn put its takeover of electronics maker Sharp Corp on hold on Thursday after discovering previously undisclosed liabilities, sources said, throwing into doubt what was set to be the biggest takeover by a foreign firm in Japan's technology sector.
Loss-making Sharp announced earlier in the day that it had agreed to be bought by Foxconn, a contract manufacturing firm that is a major Apple Inc supplier.
But, in a separate statement issued just hours later, Foxconn said it would not sign until it had clarified terms in "new material information" from Sharp. It did not elaborate.
Two sources with direct knowledge of the matter said the Japanese group had contingent liabilities that amounted to "hundreds of billions of yen".
That issue would have to be resolved before a deal could be finalised, said the sources, who spoke on condition of anonymity as the talks were confidential.
The sources did not elaborate on the nature of the liabilities or the exact amount. Reuters has not seen a copy of the new information.
A spokesman for Foxconn, known formally as Hon Hai Precision Industry Co Ltd, declined to comment on the issue. Sharp also declined to comment.
FIVE YEARS IN THE MAKING
The 11th hour delay jeopardizes a deal that would have marked the conclusion to five years of courting by Foxconn founder and billionaire Terry Gou and the opening up of Japan's insular tech sector to foreign investment.
The loss-making display maker said earlier in the day that it would issue around $4.4 billion worth of new shares to give Foxconn a two-thirds stake. Foxconn's investment is set to total more than 650 billion yen ($5.8 billion), a separate source familiar with the matter said.
If a deal does go through, it would boost Foxconn's position as Apple's main contract manufacturer and enable Sharp to start mass-producing organic light-emitting diode (OLED) screens by 2018, around the time Apple is expected to adopt the next-generation displays for its iPhones.
Foxconn sees ownership of Sharp as a way to better compete with Asian rivals such as Samsung Electronics Co.
"Sharp has the technology to build out the components to compete with Samsung as an Apple supplier, which means that with Sharp under its umbrella, Foxconn can help Apple wean itself off Samsung," said Gavin Parry, managing director of Parry International Trading, a brokerage in Hong Kong.
"This gives Foxconn better pricing power with Apple," he added.
Before Foxconn's late statement, Sharp's stock tumbled to end 14 percent lower as the share dilution looked larger than expected, with traders noting the proposed deal included the issuance of a class of shares that would be convertible next year.
Sharp's board voted unanimously to accept the Foxconn offer over a rescue by a state-backed investment fund, Chief Executive Kozo Takahashi told reporters.
Foxconn shares ended 2.6 percent higher.
THINNER, LIGHTER, MORE FLEXIBLE
Sharp said it aimed to become a global supplier of OLED screens, which are thinner, lighter and more flexible than current displays. South Korea's Samsung Display and LG Display are also investing heavily in the new technology.
The century-old Japanese firm was once a highly profitable manufacturer of premium TVs and a favored screen supplier to Apple.
But it has struggled in recent years as massive investments in advanced liquid crystal display plants failed to pay off amid price competition with Asian rivals, and two bank bailouts since 2012 did little to help turn its business around.
The late hitch revived memories of a breakdown in 2012 of an agreement between the two companies to form capital ties.
Lingering distrust over the previous collapsed deal was one reason for the government and Sharp officials initially supporting a rescue plan by state-backed Innovation Network Corp of Japan (INCJ).
The boards of Sharp Corp. and Foxconn Technology Group will meet separately on Wednesday to discuss a revised takeover package that could slash at least 245 billion yen ($2.16 billion) off the price tag for the troubled Japanese electronics maker, people familiar with the matter said.
Under the new terms, which people familiar with the matter said are still under negotiation and could change, Sharp would issue new shares to Foxconn in exchange for an infusion of ¥ 389 billion for about a two-thirds stake, down from Foxconn's original offer of ¥ 489 billion.
To make up for the shortfall, the people said Sharp's two main lenders, Mizuho Bank and Bank of Tokyo-Mitsubishi UFJ, would offer a credit line of ¥ 300 billion to Sharp, which makes everything from televisions to solar panels to screens for Apple Inc.'s iPhones.
The two banks, which have held ¥ 200 billion worth of preferred Sharp shares since they bailed the company out last year, would let Foxconn delay buying those shares for about three years, the people said.
Foxconn, known formally as Hon Hai Precision Industry Co., originally offered to buy half the shares for ¥ 100 billion.
The people said a side agreement for Foxconn to pay ¥ 45 billion for the land beneath Sharp's advanced display panel factory in Sakai, Japan, was canceled, according to the revised terms. The people said discussions with Sharp's two main lenders over revised terms for Sharp's ¥ 500 billion in bank debt—such as lowering interest rates on the loans and lengthening the payback schedule—are continuing.
Foxconn and Sharp are tentatively planning to announce an agreement at a news conference that could come as early as Saturday, people familiar with the matter said.
In a statement, Foxconn said it would hold a regular board meeting on Wednesday, though discussions about Sharp would depend on the progress of the negotiations. A Sharp spokesman said it is working with Foxconn to reach an agreement as soon as possible.
Some Sharp board members, including Chief Executive Kozo Takahashi, are expected to step down once the deal is approved by Sharp shareholders in June, one of the people said.
Sharp on Monday announced that Tetsuo Onishi, an executive vice president in charge of restructuring its display business, will step down Thursday.
People familiar with the matter said the revised terms came due to the extra time Foxconn had to conduct due diligence. Over the past month, Foxconn has sent hundreds of people to take stock of everything from Sharp's information-technology infrastructure to its inventories, two of the people said, adding that the teams have uncovered issues related to factory overcapacity and China sales that helped to convince Sharp's lenders to agree to revised terms.
Sharp declined to comment on details of the negotiations, including what the company has discovered through the due diligence process.
For the fiscal year ending this month, Sharp is expected to report a net loss of ¥ 200 billion, people familiar with the matter said, due to weaker sales of display panels and an extraordinary one-time loss. In the previous fiscal year, Sharp posted a loss of ¥ 222 billion.
Sharp's board initially approved a package from Foxconn to buy the floundering Japanese company for ¥ 659 billion in late February. However, Foxconn left Sharp standing at the altar after the Taiwanese company received a document from Sharp outlining an additional ¥ 350 billion worth of contingent liabilities—or potential future financial risks—that hadn't previously been disclosed, according to people familiar with the matter.
Atsuko Fukase in Tokyo and Eva Dou in Beijing contributed to this article.
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