Sharp mulls review of Hon Hai capital alliance deal

Kydo

Sharp Corp. is considering reviewing the terms of Hon Hai Precision Industry Co.’s investment in the company in light of the share price plunge triggered last week by its expanded loss projection, sources close to the matter said Monday.

Under a capital alliance agreement in March, the Taiwanese firm agreed to acquire a 9.9 percent stake in the Osaka-based company by paying ¥550 per share. But in the wake of Sharp’s share price plunge to ¥192 on Friday, Hon Hai — better known internationally by its trading name Foxconn — announced it had agreed with Sharp to review the arrangement. Hon Hai supplies key components used in iPhones and other Apple Inc. products.

Sharp is likely to renegotiate the terms of the deal by letting Hon Hai buy the shares at a lower price, the sources said. But Sharp said immediately after the announcement that there was no agreement as of Friday.

If the terms change, Sharp will have to secure funds via other means to improve a financial standing weakened by more than ¥1.2 trillion of interest-bearing debt and a drop in its share price.

Under the agreement in March, the Hon Hai group was to invest about ¥66.9 billion by March 2013.

Sharp’s stock plunged Friday on the Tokyo Stock Exchange after the electronics giant said the previous day that it expected a group net loss of ¥250 billion instead of ¥30 billion for the year to next March, and would move to restructure by shedding 5,000 jobs.

On Monday it fell further, briefly dipping below ¥180 for the first time in 38 years and closing down 5.7 percent at ¥181 amid unclear prospects for recovery, analysts said.

Sharp said it will reduce its debt by ¥400 billion this year by removing its struggling liquid crystal display unit in Osaka Prefecture from its balance sheet and selling off the assets, and by taking advantage of funds from Hon Hai.

But Moody’s Investors Service said Friday there is “some uncertainty” about whether the company can achieve its target of slashing debt, citing the deteriorating business environment and other reasons.

On Friday, the credit rating agency downgraded its short-term ratings on Sharp, reflecting concern that its weak performance and additional restructuring costs will continue to put downward pressure on cash flow, thus increasing its dependence on external sources for liquidity, it said.

In a statement, Moody’s said it expects Sharp’s overall earnings will continue to be pressured by weaker-than-expected demand for LCD TVs in Japan and a slowdown in demand amid increasing competition for small and medium-size LCD panels.