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 a share. Sharp shares have plunged 31 percent below that to 382 yen, meaning if the deal closed today at the agreed price, Hon Hai would have a paper loss of $261 million, equal to 52 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.
“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. The stock fell 2.3 percent to 382 yen at the close of trading on the Tokyo Stock Exchange today. Hon Hai slid 3.9 percent to NT$82 in Taipei trading, the stock’s lowest close since Jan. 2.
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 month 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.
Based on the May 21 closing price of 366 yen, Hon Hai would realize a loss of NT$6.3 billion ($210 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.
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.”