Foxconn's Four-Year Sharp Pursuit Stumbles Near Final Hurdleby , , and
Billionaire Gou delays final agreement citing new information
Sharp shares suffer biggest two-day drop in almost a year
Foxconn learned this week about liabilities at Sharp that could exceed 300 billion yen ($2.7 billion) under certain circumstances, prompting Gou to delay signing a final agreement for control, according to people familiar with the matter, who asked not to be identified as the talks are private. Bankers and lawyers will meet on the weekend to sort through the issue with a goal of resolving matters over the next week, said a person familiar.
That delay came just hours after Sharp outlined plans to sell new stock to Foxconn in a move that would deliver a majority stake to the assembler of Apple Inc.’s iPhones and iPads. While Gou out-maneuvered and outbid Innovation Network Corp. of Japan to get the backing of Sharp’s board for his bailout, the potential costs of restructuring a company that has endured chronic losses prompted second thoughts.
“It’s odd that after chasing a company for four years you wouldn’t do your due
diligence and find out about off-balance sheet contingent liabilities far ahead
of striking a final agreement,” said Alberto Moel, an analyst at Sanford C. Bernstein & Co.
The contingent liabilities, which are triggered by events such as restructuring or layoffs, could be much lower than 300 billion yen, the people familiar said.
The weekend talks will try to determine how much of that Foxconn can avoid taking on if the deal proceeds, a person said. Gou and Sharp Chief Executive Officer Kozo Takahashi plan to meet over the weekend as well, the person said.
Foxconn is continuing negotiations and still expects a “satisfactory conclusion” to the deal, according to an exchange statement Friday. The company hired JPMorgan Chase & Co. as its financial adviser.
Shares of Sharp finished 11 percent lower in Tokyo, leading to their biggest two-day decline in almost a year.
Under a plan announced by Sharp, Foxconn would get control over the company by spending 484.3 billion yen to buy additional shares at a discount and give Gou’s empire 65.9 percent of the Japanese company.
Foxconn put out a one-paragraph statement late Thursday after Sharp disclosed the terms.
It read in its entirety: “We acknowledge receipt of a notice today from Sharp’s board choosing us as their preferred partner. After receiving new material information from Sharp yesterday morning, we have accordingly informed Sharp last night (before their board meeting on 2/25) that we will have to postpone any signing of a definitive agreement until we have arrived at a satisfactory understanding and resolution of the situation.”
Foxconn declined to comment on any potential liabilities, citing a non-disclosure agreement with the Osaka-based company. Sharp has properly disclosed all contingent liabilities and sees no need for further disclosures as it continues to cooperate with Foxconn toward the final agreement, the Japanese company said in a statement on Friday.
“There is no obligation under Japanese accounting rules to disclose contingent liabilities,” said Hideki Yasuda, an analyst at the Ace Research Institute in Tokyo. “The fact that Sharp didn’t have to set aside money for this suggests that the probability is low and more of a latent risk.”
Gou is seeking to broaden Foxconn’s remit, transforming it into a company that also makes key electronics components and devices. Foxconn had proposed a total rescue plan worth about 660 billion yen, a person familiar said previously.
He announced plans to invest in Sharp in 2012 and buy shares at 550 yen a piece, a deal that was never consummated as the maker of Aquos TVs posted record losses and its stock tanked. This week’s deal involved buying shares at 118 yen each.
Sharp would remain an independent company and keep the brand under new ownership, it said in a statement. The Japanese company, which pledged to maintain employment levels, would work with Foxconn on next-generation high-end flexible displays for smartphones and other devices.