Sharp Cut to Junk by S&P as Foxconn’s Gou Ends Visit

Sharp Corp. (6753)’s credit rating was cut to speculative grade by Standard & Poor’s as Foxconn Technology Group said it was still renegotiating a planned investment. The stock fell 13 percent, and Sharp found a defect in some smartphone displays.

Standard & Poor’s lowered its long-term rating on the Osaka-based electronics maker by two levels to BB+, the highest non-investment grade, saying it suffers from weak cash flow and deteriorating market conditions. Sharp, which has the biggest percentage decline on the MSCI Asia Pacific Index (MXAP) this year, was kept on a negative ratings watch.

Terry Gou, the billionaire founder of Taipei-based Foxconn, left Japan this week without announcing the conclusion of a deal to invest in Sharp. The two companies are renegotiating an investment agreement reached in March after Sharp widened its full-year loss forecast eightfold, causing its share price to slump.

“Terms and conditions of the deal remain uncertain,” S&P said in a statement today. The ratings company will continue to monitor the Foxconn alliance talks and may downgrade Sharp further if its prospects for recovery or its “relationships with credit banks and strategic partners worsen,” it said.

Panel Defect

Sharp’s September 2013 convertible bonds dropped 6.3 percent to 74.50 yen per face value of 100 yen, the biggest daily decline since Aug. 8. Today’s stock-price plunge of 13 percent to 198 yen is the biggest since Aug. 3 and extends Sharp’s slump this year to 71 percent.

The company found a defect during a “dropping test” for display panels made in Kameyama, Japan, for an unspecified client, Tetsuo Onishi, the senior executive managing officer in charge of accounting, told reporters in Osaka today. Sharp is trying to avoid delaying a client’s product launch, he said.

“It’s a minor problem that we need to clear, we want to aim for perfection,” Onishi said. “We don’t want people to think products made at our Kameyama plant are garbage.”

Sharp has delayed mass production of screens for the new iPhone because of manufacturing problems, the Wall Street Journal reported earlier today, citing people familiar with the matter. The company had planned to start shipping them by today, the report said.

Further Downgrade

Miyuki Nakayama, a spokeswoman for Sharp, declined to comment on whether the company makes displays for iPhones. Apple’s Japan office declined to comment, according to a spokesman who wouldn’t be named, citing company policy.

Standard & Poor’s also cut Sharp’s short-term rating to “B,” the highest non-investment grade, and said that may be cut further.

Foxconn, the assembler of Apple Inc. (AAPL) iPhones and iPads, doesn’t expect to announce a deal with Sharp today, Simon Hsing, a spokesman for the Taipei-based company, said by phone. The Taiwanese company said earlier this month it hoped to finalize terms of the transaction by today.

“It’s not that we didn’t make any progress” in talks with Foxconn this week, Onishi said. The company wants to complete the deal “ASAP,” he said.

Foxconn’s Gou didn’t appear at a scheduled press conference in Sakai, Japan yesterday and left the country without making any public statement.

Gou’s Silence

“It gave the impression that talks may have gotten complicated when Gou didn’t show up at the scheduled press conference,” said Nobuo Kurahashi, an analyst at Mizuho Financial Group Inc. (8411) in Tokyo. “There have been many reports saying a final agreement is close, raising expectations.”

Sharp President Takashi Okuda met with other Foxconn executives in Osaka yesterday to discuss alliance terms, Hiroshi Takenami, a spokesman for the Japanese company, said yesterday. The two companies are still in talks to renegotiate the March investment agreement, Foxconn Vice President Tai Jeng-wu said yesterday in Sakai. The talks haven’t reached a final stage, he said.

Foxconn, through its two Taipei-listed units, Hon Hai Precision Industry Co. (2317), the world’s largest contract manufacturer of electronics, and Foxconn Technology Co., a maker of computer cases, agreed in March to buy 9.9 percent of Japan’s biggest liquid-crystal display maker for 67 billion yen ($853 million) in a sale of new shares.

Raising Cash

Gou’s group agreed in March to invest 133 billion yen in Sharp and an affiliated display-making plant. Gou has already invested his own money in Sakai Display Products Corp. to jointly run the unit with Sharp and has said he expects to list its shares in Taiwan in 2014.

Foxconn “can’t fail” in the renegotiation of its proposed investment in Sharp, Tai said yesterday at a briefing in Sakai. “But we will not rush into any decisions.”

Sharp is seeking to raise cash and cut costs as it faces a total 706 billion yen in bonds, commercial paper and borrowings maturing within one year. The company will cut 5,000 jobs, its first workforce reduction since 1950, as part of plans to reduce fixed costs by 100 billion yen, it said earlier this month.

Foxconn plans to proceed with its investment in Sharp “at the most appropriate time and most appropriate price” because it’s looking at the long-term prospects, Gou said Aug. 5.

Gou left Japan, said Taiwan’s former Vice President Vincent Siew, who was traveling with Gou as part of a business delegation.

“There is speculation and concern over whether Sharp will really get the capital,” Mizuho’s Kurahashi said. “The shares probably won’t rebound for any reason other than a formal announcement by the companies that their capital tie-up is going through.”

To contact the reporters on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net; Masatsugu Horie in Osaka at mhorie3@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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