INCJ Sticks by Sharp Rescue Plan as Foxconn Talks Continue

  • Fund chief Shiga says proposal will keep Sharp independent
  • Foxconn said Sharp has until Feb. 29 to decide on rival offer

Innovation Network Corp. of Japan is confident Sharp Corp. will see its rescue plan as superior to a competing bid even as the struggling electronics maker enters talks with Taiwan’s Foxconn Technology Group.

“We are not giving up,” INCJ Chief Executive Officer Toshiyuki Shiga said in an interview in Tokyo on Wednesday. “Ours is clearly the better option for Sharp.”

While Foxconn is bidding for the whole company, INCJ plans to inject cash and revive individual Sharp businesses by combining them with other assets to create stronger operators, Shiga said. Sharp’s liquid crystal display operations would be merged with those of Japan Display Inc., where the fund is a major shareholder, while the white goods operations would join those of Toshiba Corp. that INCJ is in talks to buy, he said.

Foxconn last week said it was the preferred bidder for Sharp after its Chairman Terry Gou pushed hard for a deal, even as it looked unlikely he would win. Sharp had been inclined to take the INCJ proposal, people familiar with the matter said last month. But then Gou raised his bid from 600 billion yen ($5.2 billion) to about 660 billion yen and flew to Japan to make a personal appeal to the target’s board, banks and government officials, a person familiar with the matter has said.

Apples and Oranges

INCJ’s proposal for a 300 billion yen ($2.6 billion) cash infusion into Osaka-based Sharp has been compared unfavorably with Foxconn’s offering. The fund has argued that its package of cash, asset sales and support from lenders is worth 1 trillion yen. Shiga says comparing the amounts is all but meaningless.

“Foxconn is investing into what would become their own subsidiary, they can plow in as much as they want,” he said. “As a fund, our mandate is to invest in growth and exit in five to seven years. Sharp can then go on being a public company.”

Shiga said there is no need to sweeten INCJ’s proposal, with the current offer providing a viable plan for Sharp.

Sharp and Japan Display both supply screens to Apple Inc., competing with others including LG Display Co.

‘Third Player’

“They are the third player when it comes to displays for Apple, acting as filler capacity, because they haven’t been able to consistently supply at volume. That’s why the preferred partners have been LG Display and JDI,” Alberto Moel, an analyst at Sanford C. Bernstein & Co., said prior to the interview. “Japan Display has better positioning to take on Sharp than Foxconn, because they have a common product portfolio and a common customer, Apple. ”

INCJ’s proposal included 350 billion yen in support from its lenders, according to documents the fund presented to Sharp and obtained by Bloomberg News. The fund also proposed raising 150 billion yen from selling Sharp’s stake in Sakai Display Products Corp. and 200 billion yen in financing.

The lender support in INCJ’s proposal would include a 110 billion yen debt-for-equity swap, according to the documents. Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc. would also cancel 225 billion yen of preferred stock they hold in Sharp, shares Foxconn is offering to buy, according to the documents. Shiga declined to reveal details of the proposal.

Foxconn Deadline

Foxconn’s Gou emerged from a nine-hour meeting with Sharp on Friday and said final agreement is expected by Feb. 29. Negotiations with Sharp are 90 percent complete, he said at that time.

About an hour later, the Osaka-based company contradicted his comments, saying that INCJ’s bid is still in play.

“We continue our talks with both companies,” said Yoshifumi Seki, a spokesman for Sharp. An e-mailed inquiry to Foxconn’s media relations office wasn’t returned.

Market Reforms

Sharp fell 6.1 percent to 155 yen in Tokyo on Wednesday. The stock, which gained 27 percent last week on reports Foxconn may emerge as the winner, has retreated 12 percent since.

The battle for Sharp has drawn attention as a test case of Japan’s willingness to open its economy, following Prime Minister Shinzo Abe’s appeal for market reforms and overseas investments to boost growth. Letting Sharp go to a foreign investor would threaten Japan Display and perhaps the rest of the domestic screenmaking industry for mobile devices.

Hearing these criticisms is where Shiga got most animated. He feels the fund’s role has been severely misunderstood.

INCJ’s Mission

“We have gotten absolutely no pressure from the government and keeping Sharp’s technology from going overseas is not at all our motivation,” he said. “That would be a misuse of taxpayers’ money indeed.”

INCJ was created in 2009 with 2 trillion yen, majority government ownership, and a mandate to promote the next generation of technologies and companies. Shiga sees the fund as paving the way for a functioning free market in an economy that’s become ossified after years of stagnation. Its mission is to speed up growth by prying underperforming assets from companies and making them profitable.

The fund put money into Renesas Electronics Corp., which was formed in 2010 from the struggling semiconductor operations of Mitsubishi Electric Corp., Hitachi Ltd., and NEC Corp. INCJ later created Japan Display from the troubled screenmaking units of Toshiba Corp., Sony Corp., and Hitachi with a 200 billion-yen infusion.

“Japanese companies have elevated job preservation to a virtue,” Shiga said, drawing diagrams on the conference room whiteboard to support his case. “If Japanese managers did what needed to be done, there would be no need for our existence.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE