March 18, 2016 11:55 pm JST

Foxconn remains committed to Sharp deal as 'time pressure' mounts

DEBBY WU and SHUNSUKE TABETA, Nikkei staff writers

TAIPEI/TOKYO -- Hon Hai Precision Industry is racing to take stock of Sharp's overall condition, aiming to complete its buyout before the Japanese company's bank loans expire at the end of the month, sources told The Nikkei earlier this week.

     

While the latest round of due diligence has exposed no major issues, Hon Hai, a key iPhone assembler better known as Foxconn Technology Group, continues to comb through Sharp's financial and operational records with financial adviser JPMorgan, a source said. The research covers everything from inventory to staffing levels at the troubled electronics maker.

     "Foxconn Chairman Terry Gou remains firm in his wish to buy Sharp," the person said. "The company is also still striving to ink the deal by the end of March, although Foxconn is now under huge time pressure to meet that deadline."

     Foxconn is being extra cautious after a previous due diligence blunder, sources said. On Feb. 24, just one day before Sharp's board decided to accept the Taiwanese company's 660 billion yen ($5.92 billion) turnaround offer, Foxconn learned that the Japanese company had some 350 billion yen in contingent liabilities.

     Even though Foxconn's external adviser determined that a significant portion of those liabilities carry low risk, the world's largest contract electronics manufacturer decided to hold off on the deal. The two companies subsequently agreed to kick off a fresh round of due diligence, with a tentative deadline of March 7.

     Gou, however, wants to take his time to gain a better understanding of the company he is about to acquire, the sources said. The goal is to wrap up the deal before Sharp's 500 billion yen worth of loans from its two main creditors, Mizuho Financial Group and Mitsubishi UFJ Financial Group, expire on March 31 -- the end of the fiscal year in Japan.

     Mizuho and MUFG have said a renewal of the loans depends on Sharp securing a bailout package.

     The banks have reason for concern. If Foxconn and Sharp do not close their deal this month, the banks' financial results for all of 2015 could be adversely affected, since they may have to downgrade loans to Sharp, according to people close to Mizuho and MUFG.

Gou's will

Neither Sharp nor Foxconn on Friday offered any update on the ongoing talks.

     Instead, Foxconn again referred to its statement from Feb. 28, saying the two sides still have not set a signing date but are working together to "reach a satisfactory agreement as soon as practically possible." This at least hints that Foxconn's attitude toward the deal has not changed.

     Indeed, though Foxconn has been generally quiet during the new round of due diligence, it has been sending signals that it is committed to rescuing Sharp. After all, the Taiwanese company needs to find a new source of growth now that global demand for smartphones is slowing.

     During the first week of March, Gou toured Sharp facilities in Osaka and met Sharp President Kozo Takahashi. On March 7, the Taiwanese tycoon attended a global meeting held by Sharp in Bangkok to discuss how to boost overseas health and environmental businesses. He also visited the Japanese company's home appliance production lines in Thailand.

     Earlier this week, Takahashi and bank representatives visited Taipei for further discussions. Local media, meanwhile, discovered through exchange filings that Gou had pledged some 170 million of his Foxconn shares -- worth about 13.3 billion New Taiwan dollars ($410 million) -- to Taiwanese banks in return for personal loans in mid-February. Foxconn declined to comment on Gou's personal loans.

     According to Sharp's statement on Foxconn's offer on Feb. 25, Gou will fund part of the deal via his personal investment arm, SIO International Holdings. SIO will provide about 49.5 billion yen for the buyout.

     The drawn-out process has only added to Sharp investors' anxiety, though. On Wednesday, the company's shares shed 11.8% to close at 134 yen and recovered only slightly the next day.

     And while Foxconn is working to complete the acquisition by the end of March, Gou's strongman style and knack for negotiating mean there is always a chance the company might determine it needs more time to secure the best terms for itself and its shareholders.

     "If the Sharp bailout requires collaboration from banks, the Japanese government and the two companies involved, the other parties will eventually bow to Gou's will," predicted a person familiar with the talks.

Asia300

Hon Hai Precision Industry Co., Ltd.

Taiwan

Market(Ticker): TAI(2317)
Sector:
Industry:
Electronic Technology
Computer Peripherals
Market cap(USD): 65,897.41M
Shares: 17,328.73M

Sharp Corp.

Japan

Market(Ticker): TKS(6753)
Sector:
Industry:
Consumer Durables
Electronics/Appliances
Market cap(USD): 17,884.59M
Shares: 4,994.52M

Mizuho Financial Group, Inc.

Japan

Market(Ticker): TKS(8411)
Sector:
Industry:
Finance
Major Banks
Market cap(USD): 45,049.98M
Shares: 25,389.64M

Mitsubishi UFJ Financial Group, Inc.

Japan

Market(Ticker): TKS(8306)
Sector:
Industry:
Finance
Major Banks
Market cap(USD): 89,137.89M
Shares: 14,027.69M

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