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Hon Hai-Sharp deal’s nearly monthlong delay raises risk of rupture

by and

Bloomberg

Hon Hai Precision Industry Co.’s delay in finalizing a takeover agreement for Sharp Corp. is raising risks that the deal the Taiwanese company has pursued for months will fall apart before it’s completed.

It has been 25 days since Sharp’s board voted in favor of a bailout proposal from Hon Hai, also known as Foxconn Technology Group, over a competing offer from Innovation Network Corp. of Japan. Hon Hai’s bid totaled more than ¥600 billion ($5.4 billion), including ¥489 billion to acquire new shares in Sharp and ¥100 billion to acquire preferred stock from the company’s main banks.

Since that time, Hon Hai Chairman Terry Gou has held off in signing a final agreement with Sharp as his advisers examine the company’s finances. Hon Hai has sought to reduce the amount it is supposed to pay Sharp’s banks and wants more clarity on Sharp’s performance in the current quarter, people familiar with the matter have said.

Hon Hai is also seeking to reduce its payment for new Sharp shares by 10 percent to 20 percent from the original ¥489 billion, the Yomiuri newspaper reported. The Taiwanese company is seeking to reduce its offer for Sharp by about ¥100 billion, Jiji News reported Monday without citing its sources.

“Usually, Foxconn cannot change the terms even if INCJ gives up the deal,” said Hideki Yasuda, an analyst at Ace Research Institute in Tokyo. “I’ve never heard such a case before.”

Hon Hai and Sharp have said they are working toward a final agreement.

“Sharp and Foxconn have not set a signing date. Both companies are working hard to reach a satisfactory agreement as soon as practically possible,” Toyodo Uemura, a spokesman for Sharp, said last week.

Another Sharp spokesman, Yoshifumi Seki, declined to comment on the Yomiuri report when contacted by phone Sunday.

“We have no new update since Feb. 28,” Louis Woo, a spokesman for Foxconn said in an email. On Monday, Hon Hai said it is working under practical terms to reach a satisfactory agreement.

A reduction in the value of Hon Hai’s offer would put it closer to the bid from INCJ. The Japanese government-backed investment fund had offered about ¥300 billion for Sharp, all of which would have been put into the company through the purchase of additional shares.

Hon Hai first said it would postpone finalizing the Sharp agreement only hours after the company’s board had voted for its bid on Feb. 25. Hon Hai said at the time it needed to work through new information it had received from Sharp.

That information included about ¥300 billion in potential liabilities for restructurings and layoffs, people familiar with the matter said.

Hon Hai’s lawyers and bankers had sorted through the contingent liabilities and concluded earlier this month they would likely not require major changes in the board-approved deal, people familiar with the matter have said. Since then, however, Hon Hai has sought to get more clarity on the Osaka-based company’s financial performance in the current quarter, people familiar with the matter have said.

Sharp has forecast a ¥10 billion operating profit for the year ending March 31 and didn’t give net income or quarterly outlooks. The company will probably report an operating loss of ¥23.9 billion for the fiscal year, according to an average of analyst estimates compiled by Bloomberg. The company is expected to post a net loss of ¥23.9 billion in the fourth quarter alone, according to estimates.

Atul Goyal, an analyst at Jefferies Group LLC, said last week that given Sharp’s financial struggles, any delay over a fourth-quarter loss looks like a “negotiating ploy by Foxconn.”

Hon Hai is seeking to reduce the price it pays for new Sharp shares from the original ¥118 each because of concerns over potential financial liabilities and future earnings, the Yomiuri reported. The Taiwanese firm is also considering cutting the size of a ¥100 billion deposit it planned to pay Sharp in advance of closing the deal, the newspaper said.

Sharp is facing a potential cash squeeze because of the expiration of ¥510 billion in credit lines and loans on March 31. The company’s banks, Mizuho Financial Group and Mitsubishi UFJ Financial Group, have pushed for a bailout agreement before those loans are renewed, sources have said.

Hon Hai is also in talks with Mizuho and Mitsubishi UFJ to reduce the interest rates on the ¥510 billion in credit lines and loans, the Nikkei newspaper reported, without saying where it got the information.

Sharp has been losing money for years and its need for financial support set off the takeover battle between Foxconn and INCJ last year. Its cash and equivalents totaled ¥208.5 billion at the end of December while total debt was ¥792.7 billion, according to data compiled by Bloomberg.

“It’s difficult to expect what would happen from now,” said Ace Research’s Yasuda.