Foxconn and Sharp Approve $3.5 Billion Takeover Deal

Mar 31, 2016

Taiwanese company believes deal will improve its position on the technology value chain

The boards of Sharp Corp. and Foxconn Technology Group approved a plan Wednesday for the Taiwanese electronics assembler to buy struggling Japanese consumer electronics giant for 389 billion yen (US$3.5 billion), a nearly $2.5 billion haircut from its original offer price.

The deal, ending months of negotiations, marks a victory for Foxconn, which has been looking to expand in the market for next-generation displays through the acquisition of Sharp, a supplier of smartphone screens to Apple Inc. Foxconn believes acquiring Sharp would allow the company to move up the technology value chain by manufacturing smartphone screens, which are the most expensive components in mobile devices.

Based in Osaka, Sharp offers a range of consumer products in Japan, from desktop calculators to flat-screen TVs and refrigerators. It invented many of the world’s first tech products during its 103-year history but fell into deep financial trouble beginning in 2012 due to big investments in display screens and solar panels. Its products remain preferred choices for Japanese consumers, but Sharp hasn’t been able to expand its business globally due to a lack of resources.

“We have much that we want to achieve and I am confident that we will unlock Sharp’s true potential and together reach great heights,” Foxconn Chairman Terry Gou said in a statement Wednesday.

Under the revised terms, Sharp plans to issue new shares to Foxconn in exchange for an infusion of ¥389 billion—lower than the previous offer of ¥489 billion—which would initially give the Taiwanese company, known formally as Hon Hai Precision Industry Co., a 66% stake. The total price includes the purchase of both common shares worth ¥289 billion and preferred shares worth ¥100 billion. Foxconn can convert the preferred shares into common shares starting in July 1, 2017, which could increase its stake in Sharp to 72%.

Foxconn will buy Sharp common shares for ¥88 a piece—a discount from the ¥118 a share it offered earlier—which is a 35% discount to Sharp’s Wednesday closing price of ¥135.

Absent from the announcement were side agreements between Foxconn and Sharp’s two main lenders, Mizuho Bank and Bank of Tokyo-Mitsubishi UFJ, which, according to people familiar with the matter, plan to offer a ¥300 billion credit line to Sharp to make up for the lower capital injection. The two banks, which have held ¥200 billion worth of preferred Sharp shares after a bailout last year, will let Foxconn delay buying half those shares within three years, the people said. That could later increase the total value of the deal by ¥100 billion, one of the people said.

A definitive agreement for the deal is set to be signed on Saturday, followed by a news conference with Sharp Chief Executive Kozo Takahashi and Mr. Gou in Osaka, Sharp said.

Mr. Takahashi, along with other Sharp board members, are set to step down in June when Sharp shareholders are expected to vote on the deal at an annual meeting, people familiar with the matter said earlier.

Sharp’s filing to the Tokyo stock exchange said Foxconn can appoint up to two-thirds of Sharp’s board. A person familiar with the matter said Foxconn plans to initially appoint four new members.

The deal comes after months of negotiations between Foxconn, Sharp and the company’s creditor banks, which included an 11th-hour breakdown following revelations last month that Sharp had ¥350 billion worth of contingent liabilities, or future financial risks. The iPhone assembler deployed hundreds of people to conduct an intensive due diligence process and found that Sharp would need to restate some of its financials to reflect the liabilities, people familiar with the matter said.

Sharp also said on Wednesday that it expects an operating loss of ¥170 billion on revenue of ¥2.45 trillion for the fiscal year ending this month, due to weaker smartphone panel sales in China and some extraordinary charges related to restructuring. Previously, Sharp had expected operating profit of ¥10 billion and ¥2.7 trillion in revenue.

Foxconn on Wednesday said its fourth-quarter net profit fell 6.7% from a year earlier to 52.9 billion New Taiwan dollars ($1.6 billion), while sales slid 4.7% as slower sales at Apple weighed on its earnings.

Even after the deal is sealed, analysts said turning around the company while avoiding layoffs and integrating a firm with a different work culture will be challenging.

“It’s a can of worms,”said Bernstein Research analyst Alberto Moel. “Sharp has been trying to turn around for years.”

Foxconn plans to invest in Sharp to expand its screen production capacity, including investing in a new type of display technology known as organic light emitting diode, or OLED. Apple is expected to use the technology in future iPhones, according to people familiar with the matter. Sharp said it would spend two-thirds of what Foxconn plans to invest in the company to beef up its panel manufacturing technology.

Currently, Samsung Electronics Co. is the leader in OLED screen production with about 95% of the global market share, according to data from research firms.

“Sharp owns several key display-related patents that should benefit Foxconn when expanding its own panel-making business,” said Yoshio Tamura, a senior director at IHS Technology.

Mr. Gou has said Sharp’s brand is also attractive. Foxconn’s chief has long said he wouldn’t compete against his clients, but the Taiwanese company has shown interest in dipping into the brand business in recent years.

“The best part of Sharp is its brilliant ability to combine worn-out technologies to produce really innovative goods,” said Atsushi Osanai, an associate professor at Waseda Business School.

 

Source: The Wall Street Journal