Foxconn Counts on Apple’s Future Through Sharp Investment

Sharp Corp., the maker of Japan’s first commercial TVs, is turning to Foxconn Technology Group (FOXCGZ) and founder Terry Gou for a $1.6 billion investment to help turn around a business heading for its worst loss in a century.

“The tie-up shows how bad things are for Sharp,” said Edwin Merner, president of Tokyo-based Atlantis Investment Research, which manages $300 million. “They are in trouble and their very survival is at stake.”

Sharp predicted a loss of 290 billion yen ($3.49 billion) for the fiscal year ending March 31 because of falling prices for its Aquos TVs, a currency that reached a postwar high and a tax charge. Japan’s largest maker of liquid-crystal-display panels halved the output at its largest TV panel factory and said demand for sets won’t rise in the 12 months from April 1.

Foxconn and Gou will invest 133 billion yen in Sharp and its display unit as the Taiwan-based maker of Apple Inc. (AAPL)’s iPad seeks a supply of flat panels to drive growth. Foxconn, which also makes the iPhone, gets about 22 percent of its sales from Apple, according to supply-chain data compiled by Bloomberg.

Foxconn, including Taipei-listed flagship Hon Hai Precision Industry Co. (2317), will buy 9.9 percent of Sharp Corp. for 66.9 billion yen in a new-share sale, the Osaka-based company said in a statement yesterday. Foxconn Chairman Gou and related investment companies will buy 46.5 percent of Sharp Display Products Corp., a venture with Sony Corp. (6758), for 66 billion yen.

‘Risky, Aggressive Move’

Yesterday’s deal, the largest Japanese investment by a Taiwanese buyer, includes an agreement to purchase as much as 50 percent of Sharp (6753) Display’s LCD panels. Sharp (6753) may begin supplying panels for Apple’s iPad next month, according to researcher IHS Inc.

“This is a risky and aggressive move by Foxconn, which is betting on current and future Apple products, including the iPad and an Apple television, a product which doesn’t even exist,” said Vincent Chen, a Taipei-based analyst at Financial Holding Co. who recommends investors buy Hon Hai. “Foxconn needs the acquisition to get advanced display technology, which it currently lacks.”

Sharp shares rose by the daily limit to close at 570 yen, compared with 495 yen yesterday. Foxconn’s Hon Hai rose 4.6 percent to NT$113, the highest level in more than a year.

CDS Plunges

Foxconn entities will buy 121.65 million new shares in Sharp for 550 yen each, according to Sharp’s statement. That is 11 percent more than yesterday’s closing price of 495 yen. Sharp has declined 15 percent this year.

Credit-default swaps insuring the debt of Sharp against default plunged 48 basis points yesterday to 222.9 basis points, the lowest since March 7, according to prices from data provider CMA. The swaps reached 296.5 basis points on March 22, the highest in almost eight years, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Sharp (6753) 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.

“We needed to take action as we face a strong yen and a rapidly changing business environment,” Takashi Okuda, who becomes Sharp’s president on April 1, said at a press conference in Tokyo.

“It’s no longer an option to do everything from development, design, manufacturing, marketing and customer service. It’s more important for us to collaborate with business partners to be competitive in the market.”

IPad Supply

Sharp didn’t trade earlier today as buy orders outnumbered sell offers by about 4-to-1.

Hon Hai yesterday reported record quarterly revenue and profits, buoyed by sales of iPads and iPhones that surpassed analyst expectations. Shipments of the new iPad, released this month and made by Hon Hai, surpassed 3 million in the first three days of release, Apple said.

Sharp will supply its advanced screen technology, called IGZO, for the new iPad, while the Cupertino, California-based company may release its own TV by year-end, Chen said. IGZO displays are small- and medium-size high-performance panels using oxide semiconductors.

Third Deal

Sharp will begin shipping displays using IGZO technology for the new iPad next month, joining major supplier Samsung Electronics Co. and LG Display Co., Englewood, Colorado-based IHS said in a March 14 statement.

Sharp Display, which owns a plant in Sakai, Japan, that makes panels for TVs, said last month it will halve output as sales of screens to outside makers dropped. The factory doesn’t yet make IGZO panels, Miyuki Nakayama, a Tokyo-based spokeswoman for Sharp said yesterday.

This is the third display-related deal announced by Foxconn companies in three years. Foxconn Technology Group formed Chimei Innolux Corp. (3481) in 2010 after a three-way merger. That entity, Taiwan’s largest display maker, may post its sixth consecutive quarterly loss when it reports fourth-quarter earnings this month, according to analysts’ estimates compiled by Bloomberg.

Chimei Innolux and the Sharp businesses will function separately, Gou said in a video call broadcast at a Tokyo press conference yesterday.

Sony Demand

After the sale, Hon Hai and its wholly owned unit Foxconn Far East Ltd. will hold 6.6 percent of Sharp, and Foxconn Technology Co. (2354), a Taipei-listed maker of computer casings and electronics, and its unit Q-Run Holdings Ltd. will own 3.3 percent, Simon Hsing, spokesman for Taipei-based Hon Hai said by phone.

The sale of its Sharp Display Products shares will cut Sharp’s stake in the venture with Sony to 46.5 percent. Sony, which continues to hold 7 percent of the venture, said it may require Sharp to buy that stake if the company sold its holding.

Japan’s largest consumer-electronics exporter said it won’t make further investments in the venture.

Rating & Investment Information Inc. cut Sharp’s credit rating by two levels to A-, the fourth-lowest investment grade, from A+ on March 8 because “it will likely take time for the company to improve earnings capacity,” the Tokyo-based ratings company said earlier this month.

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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Photographer: Daniel Acker/Bloomberg

Attendees look over a Sharp Electronics Corp. prototype 85-inch 8K LCD television, with resolution 16 times the resolution of current high-def displays, at the 2012 International Consumer Electronics Show (CES) in Las Vegas, Nevada, U.S.

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Photographer: Daniel Acker/Bloomberg

Attendees look over a Sharp Electronics Corp. prototype 85-inch 8K LCD television, with resolution 16 times the resolution of current high-def displays, at the 2012 International Consumer Electronics Show (CES) in Las Vegas, Nevada, U.S. Close

Attendees look over a Sharp Electronics Corp. prototype 85-inch 8K LCD television, with resolution 16 times the... Read More

Source: Sharp Corp. via Bloomberg

Sharp Corp.'s liquid-crystal display (LCD) television panel factory in Sakai City, Osaka, Japan. Sharp Display, which owns the plant in Sakai that makes panels for TVs, said last month it will halve output as sales of screens to outside makers dropped. Close

Sharp Corp.'s liquid-crystal display (LCD) television panel factory in Sakai City, Osaka, Japan. Sharp Display, which... Read More

Photographer: Thomas Lee/Bloomberg

Gou Tai-Ming "Terry", chairman and president of Hon Hai Precision Industry Co. Close

Gou Tai-Ming "Terry", chairman and president of Hon Hai Precision Industry Co.

Photographer: Haruyoshi Yamaguchi/Bloomberg

Takashi Okuda, incoming president and chief executive officer of Sharp Corp., adjusts his glasses during a new conference in Tokyo. Close

Takashi Okuda, incoming president and chief executive officer of Sharp Corp., adjusts his glasses during a new conference in Tokyo.

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